Uncle Sam: Too Fat to Fail?

Three weeks before the selection of a U.S. president, we are witnessing a generalized global collapse of confidence in financial and political institutions. Each hour, it seems, brings another reason to withhold faith.

On Tuesday, after another dramatic plummet in the Dow Jones Industrial Average of 508 points, the American people sat down at 9 p.m. to watch between the two men running for the U.S. presidency “debate.” Forgoing Ambien the first time this week, they rose in the morning to learn that the Federal Reserve and four European central banks plus Canada’s cut interest rates a half-point to boost confidence in their financial markets. Hours later, the Dow in the U.S. opened and fell 250 points.

The rarest coin in the realm now is confidence. Let us posit that John McCain and Barack Obama in their debate or at any given hour are doing next to nothing to raise confidence. They have company in their failure — 535 Members of Congress and one President.

President George W. Bush’s approval rating hangs at 25%, nearly an unprecedented low. Congress’s approval is at historic lows. A Rasmussen poll last weekend said nearly 60% of the public would chuck the entire Congress.

The standard remedy for this in political systems everywhere is throw the bums out. In 2006’s off-year congressional election, the American people threw out one set of Republican bums and, if current polls mean anything, replaced them with the Democrats’ finest bums.

Maybe it’s time for Plan B.

Mark down 2008 as the year that many large public and private institutions hit the wall. Suddenly, in different ways, they were manifestly failing. Why?

Tuesday’s presidential debate offered a glimpse. Amid the din of crashing banks in the U.S. and Europe and stumbling government efforts to plug the dikes, Barack Obama and John McCain airily promised to wave into life one grandiose solution after another to health insurance, social security, energy supplies and incomes. Do serious voters believe any of this?

Some weeks ago Barack Obama got into trouble for saying a difficult question was “above my pay grade.” That plastic droplet of modesty is the beginning of wisdom. Step back and most of what is before us now is above anyone’s pay grade.

Consider the magnitude of these problems or the sheer, dumb size of the institutions. Another phrase of financial usage familiar everywhere now is “too big to fail.” But if something is too big to fail, isn’t it….too big?

Look in any direction and what you see are institutions that are Too Big. Too big to fully understand, and thus too big to manage efficiently. Faced with Godzilla-sized problems, logic flees: If they’re too big to fail, the solution is….make them bigger!

The fat government we know about, with its $2.942 trillion annual outlays. The problem of unmanageable public bigness is also seen in state legislatures in a condition of permanent nonperformance, as in New York, California or Michigan. We become numb to these outsized and failing public institutions, which grind in circles while the pols purport concern about massive, forward-crawling public monoliths like Medicare, social security or public pension debt.

By contrast, the starkness and hourly reporting of the financial crisis has made the dilemma of size impossible to duck.

Citigroup, a financial-services colossus that can’t manage what it’s already got, is trying to chow down Wachovia, a slightly smaller colossus. J.P. Morgan absorbed first Bear Stearns and now WaMu bank. Bank of America acquired Countrywide Financial and then Merrill Lynch. The concern here is less that these entities are anticompetitive than that they are too big to succeed.

We’ve all been tutored in economies of scale — that bigness permits cost saving. Check out its little-known fraternal twin — diseconomies of scale, wherein size becomes a stagnant lake of inefficiency — and risk. Ever try to fight your way through Merrill’s voicemail tree? Wait til you phone customer service at BoACountrywideMerrill.

The biggest vice staring us in the face isn’t greed. It’s gluttony (now known as obesity) in both the public and private spheres. What has been laid on the table with the financial crisis and the loss of political faith is whether the U.S. system and its institutions are up to the future. Like Wall Street, Uncle Sam is not too fat to fail. Even before this crisis, intellectuals and pundits were writing off America as certain to be overtaken — politically and economically — by the likes of China and India.

Both Obama and McCain Tuesday night denounced Washington’s “special interests.” In fact, those interests are the hungry commercial pilot fish that swim alongside the massive federal Leviathan. If either man wanted to send a signal to the world that the U.S. whale was ready to move past the mortgage crisis to new strength, he would blow up the Department of Housing and Urban Development.

Fat chance. Fat’s winning.

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