This is the Cato Daily Podcast for Thursday, December 6, 2012.

I'm Caleb Brown.

Business is considered too big to fail or a troubling prospect for policy makers,

in part because their existence is

typically only contemplated after they exist. There's not much that can keep

Congress from panicking in the form of bailouts. Michael Munger is a professor of economics in

political science at Duke University. We discussed the trouble with too big to

fail last week. I read in the newspaper a couple of days ago that customers of Hostess were having to buy buns from elsewhere.

And I thought, well, that sort of makes perfect sense.

Provider is no longer able to provide the product you need.

You go buy that product somewhere else.

In high finance, the argument is that it doesn't work like that, that these are companies that are, quote unquote,

systematically important to the economy and they go out of business.

The ripple effects are so large that it's not worth allowing that to occur.

What is your assessment of that idea and how credible is that claim?

Well, the problem that we're talking about

has come popularly to be known as being too big to fail.

And the problem that we have is there's two ways of thinking about too big to fail.

One is the size of the externality of the effect that will be imposed on the rest of the

economy by the failure of this enterprise.

And so actually the too big to fail argument was made for General Motors, the reason we bailed

out General Motors, which is not primarily a financial institution, and in fact the General Motors Acceptance Corporation, the part that was the financial arm, was doing fine. They were making money. It was the car part that was going under.

...