Bear Stearns, the Macs, AIG… all were Too Big To Let Fail.

So, the question that has been bouncing about in my brain for a few months now is… if they’re Too Big To Fail, are they just Too Big?

I’m a fan of capitalism. I think that Adam Smith’s Invisible Hand is a primarily benevolent force. But I also believe that time and time again, Scale Matters.

You shouldn’t fear that radiation will cause a preying mantis to grow to 50 feet tall and begin smashing buildings, because Scale Matters, and the exoskeleton structure just doesn’t work at those sizes.

I was going to say something about spider-web (strongest natural fiber in the world) not scaling up, but maybe it will.

Wal-Mart succeeds so spectacularly because Scale Matters.

So… does Smith’s Invisible Hand formula become unstable when certain elements producing the Hand become oversized?

I feel like some mathematics need to be brought to bear on these large companies. When the numbers get large enough to threaten systemic failure, does the Hand need a nudge from regulation? In addition to Monopoly laws, do we need Size laws?

Size Laws would be complicated to be sure. A Bear Stearns-type failure might be more “impactful” than a WalMart-type failure, even if they had comparable sums of money involved.

Or is the press just Chicken Little-ing because folks who report on P/E ratios all day long are hungry for the Big Story? Is the government stepping in and preventing a severe but manageable correction (handleable by the Hand) to prevent folks from panicking in an election year?

I don’t have enough data to form a confident opinion. But it seems on the face that Too Big To Fail is To Big To Be.