“Too Big to Fail,” What the U.S. Can Learn From the Titanic

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April 5, 2012 11:03am NASDAQ:QQQ NASDAQ:QQQQ

While browsing the BBC’s news site on Tuesday, I stumbled on a piece about the Titanic. Since I’ve seen the movie – and therefore know everything about the big ship (including the fate of Rose DeWitt Bukater’s blue diamond necklace) – I’m not quite sure

why I opened the story at all. But I did regardless, with two embedded quotes immediately jumping out at me:

“There is no danger that Titanic will sink. The boat is unsinkable and nothing but inconvenience will be suffered by the passengers.” – Phillip Franklin, White Star Line Vice-President, 1912

“The bottom line is no ship is unsinkable. No matter how safe a ship is, if you drive it full speed into a rock, it is likely to sink.” – Tony Selman, Vice Chairman of the Radio Officers’ Association, 2012

A full century after the fact, most people know that the Titanic did in fact sink. That’s the beauty of hindsight: We get to shake our heads and scoff at other people’s foolish mistakes, easily accepting that there’s room for human error in anything human-made.

At least when it comes to boats. Concerning entire economies, however – especially ones we’ve put our faith in – too many U.S. politicians and citizens alike seem to think it’s a completely different story. We buy into the “too big to fail mentality,” the same exact kind that got the White Star Line into so much trouble back in 1912.

So in essence, we haven’t really learned the main lesson from the Titanic’s epic failure at all.

The Titanic Was “Too Big to Fail,” Too

When the Titanic crashed into an iceberg and sank, the twentieth century learned the hard way that nothing is indestructible. But as history repeatedly shows, it didn’t take too long for the world to forget that.

Much more recently, before the 2008 financial crisis, there were a number of stocks listed on American exchanges that analysts deemed “too big to fail.” These companies were giants of their industries, with global presences (or at least connections) and supposedly stable business strategies.

But then the housing bubble burst, leading to a national financial meltdown, which led to a global financial meltdown that’s still playing out in some parts of the world. Just like that, many of those “too big to fail” companies were abjectly failing, largely because they’d been taking on risks they could only cover in bull markets.

But rather than relearning the harsh but necessary lesson, the United States just tweaked the meaning of the term…

Usually applied to banks, it became a political term of assurance. Heavy doses of government monetary intervention was suddenly propping up businesses to ensure their survival; investors might lose 90% of their shares’ value, but not 100%.

Then again, even that modified idea of “too big to fail” didn’t hold true across the board.

While the U.S. government lent taxpayer arms and legs to every other major bank out there, including some foreign entities, it sat back and watched as Lehman Brothers – a financial giant in its time – crashed and fully burned.

America the Sinking

The Titanic – and the much more recent Concordia – proved that there’s no such thing as “too big to fail” when it comes to ships. And the same proved true of businesses in 2008.

So why do we now believe the rule of thumb might not apply to entire countries like the United States?

Admittedly, America is a huge country built off of great principles that give it great potential. It’s the economic Titanic of its day: The one that everybody wants to get on board in some way, shape or form; the nation that, for years, people considered too big to fail.

But it’s that very attitude that’s causing America’s downfall.

According to the government’s website, TreasuryDirect, as of September 30, 2000, the “debt outstanding” (i.e. deficit) stood at $5,674,178,209,886.86. By the same time eight years later, it had risen to $10,024,724,896,912.49, an appallingly large difference.

And it’s jumped further and faster in the three and a half years since.

In short, the United States’ spending habits were unsustainable at the beginning of the century, and it’s quickly reaching the point of no return. Just because it looks (or looked) impressive on the outside doesn’t mean it’s immune to the risks assaulting less significant economies even now.

Perception isn’t everything. And anytime anybody claims that anything – from ideas to businesses to economies – is too big to fail, remember the Titanic… and then book a different cruise.

Good Investing,

by Jeannette Di Louie, Investment U Research

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