Too big to fail, too small to succeed.

Too big to fail, too small to succeed.

Peter J. Wallison, a scholar at the American Enterprise Institute, wrote Dodd-Frank’s Threat to Financial Stability, in which he argues that the Financial Stability Oversight Council (“FSOC”) ruins the competitive landscape by picking those companies that are too big too fail. In so doing, the FSOC also picks those that are too small to succeed. Adam Smith would also not likely approve.

Under Mr. Smith’s theory, a highly competitive marketplace is more or less atomistic — small players with no monopoly power compete against one another. The FSOC ruins this picture. By picking certain companies that are too big to fail, the government is essentially underwriting some businesses over others. To make matters worse, these businesses likely already had market power in the first place. The FSOC only increases this power. As Mr. Wallison points out in his article, this gives unfair competitive advantage to those companies who receive the government’s blessing. And those that are too small to succeed? Well, the FSOC is apparently not to concerned with those companies. The marketplace can afford to lose them, in the FSOC’s view. At the same time, such companies are often the lead innovators because they are quicker to respond to marketplace currents. What is more, small businesses are the largest employer in the country, employing 53% of the American workforce. But even if such companies were objectively worthless, which they are not, is it the proper place of the government to pick winners and losers? Mr. Smith would likely say no. Leave that to the marketplace, not elected officials.

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