Too Big to Fail and Justification
September 25, 2008
Posts in the last few days triggered so much good discussion in the comments that I thought that it would be a shame to leave it buried there. So, here is, with minimal editing, the discussion that Martha Poon and Zsuzui Vargha had here last week, following the bailout of AIG.
Whether a firm is “too large to fail” is in fact the outcome. I want to add that it’s not only about justifications but also calculation, as Yuval suggested at the end of the original post. In order to establish how “big” the firm is in terms of market worth (along the lines of Boltanski and Thevenot), the regulators have to trace or get a vague sense of what the network of contracts looks like, estimate the scenarios, assess the ripples. Another kind of calculation is about credibility. Regulators are always called upon being consistent, because markets have to be calculable, and calculability can only be maintained if actors’ responses are not random. This is both what Max Weber already suggested, and also the lesson from socialist economies with “soft budgetary constraints”. So, regulators have to prove that what they are doing is consistent-why they are saving AIG when they are not saving Lehman.
The justifications [for saving one institution but not saving the other] become inconsistent as they pile up on each other. At some points, however, the actors do look back on their decisions and try to justify how their current super-interventionist measures fit well with their earlier anti-regulatory position. In the most grand terms, Bernanke and Paulson try to say it’s a qualitatively different situation than the ordinary state of markets-it’s a state of emergency. Such a statement allows them to discard free market dogma, gives them carte blanche, and makes them problem-solving world-saving heroes. I wonder how accountability will or will not develop after the crisis is over. Bush managed to avoid it after 9/11.
Rapid change during this crisis makes the trial and error process of policy-making much more visible than otherwise. We literally see how the regulators are shifting justifications within 24 hours, from the case-by-case, now admittedly ad hoc way of addressing the crisis, to the “systemic” view of intervention.
What do you think about the following description? That this shift of frame means that the actors have given up calculating the consequences of each failing bank, it’s too complicated and they can’t identify the losers in advance, and they can’t bail them out as companies (that would really go against their anti-interventionist position). They are now calculating in terms of product market categories (what kind of debt should the government buy), which is not specific to the individual company. So they went from a firm-centered view of where the crisis is, to a market-centered one.