C-9 WHEN TOO BIG TO FAIL, FAILS CHATTING WITH GPT

Powerful tools should be used. After playing around with GPT for a few months, I found that even though it still is not 100% accurate or complete, it is good enough to use seriously. It still is a good idea to double-check and compare its answers against literature, news, knowledge bases, etc. But it is good enough for me to chat with it and ask its opinion. So, this is the opinion-blog “CHATTING WITH OPENAI’s GPT”. The answers are fully credited to the AI.

This week’s Chat: What are the consequences when a company that is too big to fail, fails?

My motivation for this question is the observation of many opinions on social media concerning the ongoing Insurance Scandal on Curacao. It is one case of many in the financial sector, and probably not the last. We can discuss a lot about the reasons why such scandals occur, but in the end, it is about the “tone” at the top, in the middle and at the bottom, otherwise the (company) culture. That is a discussion for another time. In this blog the question is only about the possible consequences of companies that are too big to fail, fail.

So, what does GPT think about this. Let’s do this and see what we can learn.

ME: What are the consequences when a company that is too big to fail, fails?

GPT: When a company that is deemed “too big to fail” (TBTF) fails, it can have wide-ranging consequences not just for its employees, shareholders, and creditors, but also for the broader economy and financial system. Here are some potential consequences:

1. Financial System Instability: TBTF institutions are typically deeply intertwined with the rest of the financial system. Their failure can lead to a lack of confidence in the broader financial system, potentially triggering bank runs or failures of other financial institutions, leading to a broader financial crisis.
2. Economic Downturn: The failure of a TBTF company can reduce lending and spending in the economy. This can lead to reduced consumer confidence, lower investment, higher unemployment, and possibly a recession.
3. Loss of Jobs: The immediate employees of the company face job losses, but the ripple effect can extend to other related industries or suppliers.
4. Shareholders and Creditors: Shareholders might lose most or all their investments. Creditors might not be repaid in full, which can then impact their own financial stability.
5. Supply Chain Disruption: If the failing company is a key player in an industry, its failure can disrupt supply chains, affecting many other businesses, from suppliers to customers.
6. Reduced Competition: The failure of a major company can reduce competition in its industry, leading to higher prices and less innovation.
7. Taxpayer Burden: If the government decides to bail out the company to prevent wider economic fallout, it often comes at a significant cost to taxpayers.
8. Regulatory Repercussions: The failure of a TBTF company can lead to more stringent regulations and oversight for the entire industry, as was the case after the 2008 financial crisis.
9. Confidence and Trust: The failure can erode public confidence in the stability and reliability of the financial system or the industry in which the company operates.
10. International Implications: Many TBTF companies operate on a global scale. Their failure can have repercussions in other countries, affecting global markets, supply chains, and economies.
11. Litigation and Investigations: Such failures can lead to a slew of lawsuits and investigations, which can last for years and further erode confidence in the system.
12. Moral Hazard: Bailing out TBTF companies might incentivize risky behavior. If companies believe that they will be rescued due to their size, they may take on greater risks, expecting that the government will step in if things go wrong.

To mitigate these risks, many governments and regulatory agencies have put measures in place since the 2008 financial crisis. These measures include stress tests, higher capital requirements, and improved oversight. Still, the debate over how to handle TBTF institutions and the risks they pose to the broader economy continues.

ME: Elaborate more on the consequences for the taxpayer and the community

 

GPT: Certainly. The failure of a “too big to fail” (TBTF) company can have significant consequences for both taxpayers and the broader community.

For Taxpayers:

1. Direct Financial Burden: Governments may decide to bail out a TBTF company to prevent wider economic fallout. This often involves using public funds, either directly or in the form of guarantees. This can increase public debt and might lead to higher taxes in the future or a redirection of public funds from other important projects or services.
2. Indirect Economic Costs: Even if the government doesn’t directly bail out a TBTF company, the economic ripple effects, such as reduced lending, reduced consumer spending, or an overall economic downturn, can impact tax revenues. A weakened economy often results in lower tax revenues at a time when there might be increased demand for public services, like unemployment benefits.
3. Potential Future Liability: If the government offers guarantees rather than direct bailouts, taxpayers might still be on the hook if those guarantees are called upon in the future.
4. Moral Hazard: By bailing out TBTF companies, governments can unintentionally incentivize risky behavior in the future. This might expose taxpayers to recurrent risks of bailouts.

For the Community:

1. Job Losses: The most immediate effect of a TBTF company’s failure is job losses among its employees. But the ripple effect can mean job losses in related industries, suppliers, or even local businesses that rely on the spending of the company’s employees. This can lead to broader community economic distress.
2. Local Economic Downturn: Many TBTF companies are major employers in their communities. Their failure can lead to a localized economic downturn, reducing revenues for local businesses and services.
3. Community Services: With a local economic downturn, there might be a reduced tax base for local governments. This can impact community services like schools, public transportation, public health, and safety services.
4. Property Values: The failure of a major company can lead to decreased property values in the area, especially if the company was a major employer. Homeowners might find themselves with properties that are worth less than what they owe to them.
5. Social Challenges: Economic downturns and job losses can lead to increased social challenges, such as higher rates of mental health issues, substance abuse, and crime. Communities may also see increased demand for social services, at a time when funding for these services might be constrained.
6. Reduced Philanthropy: Many large companies play significant philanthropic roles in their communities, supporting local causes, charities, and initiatives. Their failure can mean a substantial reduction in this support.
7. Migration: If the community’s economic prospects dwindle significantly due to the company’s failure, residents might leave in search of better opportunities, leading to depopulation and a potential brain drain.
8. Cultural and Identity Impact: In some cases, especially in smaller communities, the company might have been a significant part of the community’s identity for generations. Its failure can affect the community’s sense of identity and pride.

ME: In essence, the failure of a TBTF company isn’t just a financial or economic event. It has broad and deep social, cultural, and psychological implications for communities and the people who live in them. That is why people need to be more involved in this discussion. You cannot just say, this is not my problem, because it is. At the end of the day, we reap what we sow.

(Answers are credited to GPT, most pictures credited to DALL-E, also an AI)