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Bailout Bandwagon

2008-12-15 13:02:22

The problem comes with the concept of "too big to fail" due to concentration.

In the general case, you are quite right, If you have a hundred bakers, and

there is not enough demand for bread to keep them all in business, the least

efficient ones go bankrupt and the more efficient ones thrive, thus increasing

the general efficiency of the baking business.

The problem is when you have monolithic industries, or quasi monolithic

industries, where the whole industry for one region sinks together. If you have

one mega-bakery and that is badly run, you cannot let it go bust because there

will be no bread and people will starve.

The DRAM industry has become increasingly capital intensive: a new Fab costs

billions, but produces vast numbers of chips. This means that there are very

few fabs in one country, probably only one. Healthy shrinkage, by a few

percent, is not possible: you lose 50% of your industry or none. And,

politically, that is unacceptable for any single country. Worldwide, it would

be correct to close down one or two DRAM fabs at the moment. A World

Government, with perhaps 12 fabs, could look at the big picture. But Taiwan,

Germany, and South Korea, with two or three each, cannot accept losing such a

large slice of their industry.

The same was true in the finance industry: because of their size, AIG, Fanny

Mae and Freddy Mac were "too big to fail". Lehmann was adjudge not to be too

big - but the repercussions of its failure are turning out much larger than

expected.

The same is true in cars. "Detroit", the Big Three American car manufacturers,

is collectively "too big to fail". And they are so interlocked in the public

mind that they would appear to sink or swim together. Mind you, their problems

are basically the result of baling out Chrysler twice instead of letting it

fail at a time when it could have failed on its own and brought the appropriate

slimming down to Detroit.