Josh @66,

Is the USA too big too fail, and thus should be broken up?

As currently constituted, the federal government is TBTF and should be broken up. But don’t conflate the federal government with the United States of America. They’re not the same thing.

I don’t think the US is TBTF. As designed, the US is already “broken up” in that most governmental authority is supposed to reside at the state and local level. But if we let things continue along the path we’re on, and allow the federal government take more control and authority, it will enfeeble the populace and we will fail. As Steyn is fond of pointing out, it is the debasement of human capital which is the real threat to the republic. And centralized power debases human capital.

With the banks, the problem is not size as such, but size backed by a taxpayer guarantee.

You’re fundamentally right (scale is an effect, not a cause), but the analysis is incomplete. Banks grew big because of a host of federal regulations (not just taxpayer guarantees, which have been in place since 1933) and Nixon’s move to fiat currency in 1971, which removed a constraint on the expansion of credit (and therefore the financial services industry).

But scale, once it reaches a certain point, is a problem in and of itself. Like gravity – just ask a black hole.

One final point. We shouldn’t lose sight of the fact that the Constitution is a conflict resolution mechanism. It can’t eliminate the conflict, only describe a process for resolving it.

Another way of stating the point that Taleb and De Soto are making is that information is critical, and conflict is that way that information is generated. The conflict between buyer and seller; borrower and lender; incumbent and challenger; states and Washington DC; Israel and Palestine; conservatives and progressives; and so on. Processes to avoid conflict are processes that suppress information.

This might be ok; where we need no additional information, conflict is expensive and pointless. Of course, how do we know that we need no additional information? That’s the attitude that creates Black Swans and Climategates. So we should err on the side of allowing conflict.

Suppressing conflict for the sake of peace also suppresses information which may cause a war. Thus the danger of political correctness, the United Nations, and quantitative easing.

By attempting to turn the Constitution from what it is (conflict resolution mechanism) into something it’s not (conflict avoidance mechanism), centralizers distort our system and turn it into something unsustainable. Scale is the mark of that distortion, so we should be very sensitive to its appearance.

Scale may only be a symptom, but symptoms are always where a diagnosis begins.

Cheers,
L3