Financial Bailouts

Zane writes about the bailout, expressing his frustration with the
amount of our money which is being spent to get these financial
institutions out of the hot water that they got themselves into.

I agree, although at this point, I'm not sure what the alternatives
are. I'm no economist, but it sounds like the consequences of not
bailing these firms out would be too terrible to imagine.

But over the long term, I wonder if the real problem, and one problem
that we should be concerned with, is the _size_ of these firms. Zane
got me thinking along the lines of Adam Smith the other day, and it got
me to imagining the economy as Smith might have thought of it. When he
was writing about the invisible hand and the functioning of markets,
most of what existed at the time in Great Britain (among other places)
were relatively small firms by today's standards. Even the biggest
weren't that big, relative to the size of the whole economy. If one of
those firms failed, no big deal, right? Firm goes down, some people out
of work... nothing that a modern welfare state apparatus can't deal with.

But what we're seeing here is an end to Schumpeterian creative
destruction. Firms aren't being allowed to fail because it would cause
too much pain among the innocents in the market.

Is it unreasonable to think that we should re-examine our anti-trust
laws to consider the size of a firm--and thus it's status as a "trust"
based not only on whether that firm can manipulate markets in an unfair
way, but whether (in the case of financial institutions like banks,
especially), the size of these firms would make a failure too harmful to
the economy as a whole.

Should the government be making sure that we have a couple hundred major
banks in the country, rather than a couple of conglomerates whose
failure could cause major havoc?

If the government played a role in overseeing the size of firms in this
way, maybe we would be able to allow financial firms to fail when the
time came.

On the other hand, maybe we would just see a lot of small firms failing
(or getting bailed out) the same way a few big ones are being bailed out
at the present.