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.