VW and the corporatization of TBTF

Most of us learned about “too big to fail” (TBTF) when the financial crisis hit.

Basically, we learned — yet again — that financial services companies gamed the system, over-leveraged themselves on imaginary “paper” assets and then, when it all came tumbling down, laid the bill at the feet of taxpayers, claiming that if they went under, the entire global economic system would fall as well.

It was a game of chicken played on a scale that has never been seen before — but a familiar game of chicken from Wall Street, all the same. They ran up gambling debts they couldn’t pay. And when the game was over, they were stuck with an IOU they turned over to us, via the U.S. government and the Federal Reserve. This had certainly happened before — the savings and loan crisis of the 1990s is the most recent example — but it was the scale, the magnitude that was overwhelming.

And after the crisis was averted (or as I would argue, simply slowed down), many governments said: “Never again.” The system cannot allow TBTF companies to exist and threaten the system again. The irony, of course, is that governments and the politicians are no longer independent of their donors. The major banks and financial institutions that started the whole mess are now bigger than ever and have swallowed all the smaller players that were supposed to be the real backbone of the banking system.

The onerous legislation to “control” the banks made it expensive and nearly impossible for regional and local banks to manage the regulations. It was easier to sell than to try to compete with the new ground rules — just like savings and loans disappeared after the savings and loan crisis, and the Big Three kept buying other brands around the globe. We don’t learn our lessons; and, certainly, neither do the big firms. History continues to repeat itself.

And if that isn’t troubling enough, now we have a story from Germany that TBTF isn’t just a financial services thing; the rationale is now being used to prop up corporations.

And who is financing it? They are some of the very same banks that were swirling the drain when the financial reckoning took place in 2008.

Scandal-hammered Volkswagen (OTC:VLKAY) has announced that it will be getting a $21 billion bridge loan from a collection of banks to cover the damage from its diesel engine scandal and the resulting law suits, fines and repairs.

Without the loan, there’s a very good chance VW would have to significantly restructure its operations. But this loan keeps “business as usual” going and moves TBTF over to the corporate world.

Now, global financial institutions can determine the life or death of global corporations. And if it doesn’t work out, you know who is taking on the risk: you and I.

Somehow, the very companies that caused the financial collapse have consolidated their power and become even more powerful.

Austrian Economist Joseph Schumpeter described healthy free markets as those that deliver “creative destruction.” To illustrate what he meant by this seemingly counterintuitive concept, he noted:

Situations emerge in the process of creative destruction in which many firms may have to perish that nevertheless would be able to live on vigorously and usefully if they could weather a particular storm.

The banks, brokerages and now VW have all skirted free market economics.

When creative destruction is stifled, the economy mutates. Some of those mutations are deadly, but they take a long time to play out. Rather than perish quickly, they perish slowly and infect others.

TBTF has become one of the most significant mutations of the financial crisis.

And it continues to spread.

The more big banks and big business centralize their strategies, the more individuals need to find ways to decentralize their assets away from these institutions.

Hard assets like physical gold and cryptocurrencies like bitcoin that are beyond national boundaries are good places to start. Property outside the U.S. — Belize, Costa Rica, Nicaragua, Paraguay or Panama, for example — is also worth considering if you really want to isolate yourself from the contagion. Bob Livingston has much more to say on offshore assets, and it’s high time you take his words to heart.

–GS Early

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