Tuesday 8 March 2016

Too big to fail, why not split?

Should we allow those big companies to fail? The answer in most cases is no. This answer is made based on subjective and objective reasons. When a company grows large enough, it naturally gains some sort of market power. They are much easier to finance themselves. Moreover, when they fail to pay back their debts, banks usually will give them some money to keep them alive. Why? Because once these big companies fail, it will destroy bankers' careers and damage banks. In addition, some companies are so large that their bankruptcies could leave thousands of people unemployed on the street, which any government never wants to see. Because of the damage to individual and public interests, when a big company is at the edge to fall, the financial companies and the government will use their resources to keep it alive and hope for a miracle. This is a highly inefficient use of resources. Moreover, such environment encourages firms to grow big and abuse their power. The worst thing is interconnection is built stronger when financial companies use their resources to save a company from bankruptcy, once this company fails to avoid bankruptcy then the financial companies which bail it out will suffer as badly as the bankrupted company. Because the financial industry its own interdependence and its connection to other parts of the economy, a domino effect will hurt the entire economy. Many markets should not have natural monopolies due to their characters; however, due to the current environment, many firms blindly expand their business fields and cause massive inefficiency. Therefore, it is important to build an environment to encourage the owners and investors to split their companies into a few of smaller but more efficient companies.

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