Dangers of Monopolies and Large Corporations
Monopolies have the potential to employ massive amounts of workers, and the potential to cause wide spread economic damage when they fail. Are these rewards worth the systemic risk to our economy, and every day life? American history is littered monopolies and large corporations that have caused, recessions, depressions, market crashes and economic uncertainty in the wake of their collapses. Monopolies also limit diversification to both consumers and to the marketplace in general, due to the nature that they would be the majority the market anyway.
Monopolies also reduce competiveness and innovations in the economy. Regardless of the industry the monopoly is in, the monopoly would also expose that industry to destabilization if it were to ever fail. Government deregulation of monopolies and major corporations further compounds the negative affects of monopolies when they fail. The effects of large corporations failing has most recently been felt in the past decade, with the both the internet bubble and the current financial crisis. One of the first instances in American history where a monopoly caused a large scale economic downturn was the Panic of 1893.
These economic disasters take years if not decades to recover from. Americas Earliest Economic Crisis’s Perhaps the earliest recorded economic crisis in America, even with the invention of railroads in the late 1800s, was the Panic of 1873 and the Panic of 1893, were two major depressions. The Panic of 1873 began after the Civil War, during President Grant’s administration. Grant’s policy of contracting the money supply was a key component to the start of the Panic. It made money scarcer while business was expanding. The Panic of 1873 also became known as the Long Depression.
In 1877, wage cuts and unemployment cause workers to strike, but the tension lifted in 1879. This panic created a gilded effect because, to the outside world, the America was a prospering nation. The Transcontinental Railroad was completed in 1869, up to the completion of the Transcontinental Railroad and afterwards the railroad industry was booming. Because of the speculation bubble in the railroad industry, this led to riskier and riskier investments in railroads. Because of the larger investments made into the railroad industry, many of railroad companies over build and over extended what they could maintain.
This over extension by the railroad industry caused the railroads to default on their debits to banks. These same banks that had invested so heavily in the railroads could not pay their own expenses causing the banks themselves to default and fail. The bank failings thus caused The Panic of 1893 that another major depression at the very end of the century. As the banks failed across the country due to the railroad defaults, banks that were not connected to the railroad crisis experienced “Run on the banks” which also caused banks to fail.
The run on the banks began when too many people attempted to redeem their silver for gold, which the banks no longer had. Businesses could not afford to slow down production during the Panic, so they continued to keep their prices high, but the people didn’t have access to the scarce money. Not only were businesses charging high prices, but also the Philadelphia and Reading Railroad went bankrupt, causing less modes of transportation for workers and farmers. In total, over 15,000 companies went bankrupt during the Panic and the unemployment was the highest in history, double digits for 6 years.
Because of the high unemployment labor unions were also created during this time to help worker keep their jobs. The American economy did not show signs of recovery till 1900, this recovery in itself was its own speculative bubble the Klondike Gold Rush. People were injured, unemployed, killed, and bankrupted and with the Panics of 1873 and 1893, the United States economy suffered greatly. Over a hundred and ten years later the railroad industry has never fully recovered, today the vast majority of the industry is owned by two companies. These two companies do not offer any consumer transportation, and have bought any smaller competitors.
America’s most resent crisis and now the worlds America’s most resent crisis was the global financial crisis that started in 2008. It began with the bankruptcy of Lehman Brothers on September 14, 2008 and it spread like a flood through financial markets. At first the U. S banking sector had a great fall in liquidity, with this contraction in commercial lending banks could not pay their expenses. Around the world stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems.
This crisis was further compounded because the majority of the banking industry in the united states was is managed by four banks. These banks are referred to as the “Big Four” them being: Bank of America, Welles Fargo, CitiGroup and JPMorgan Chase. These four banks managed 39% of the entire banking market in the U. S. , because they manage such a large amount they have been deemed “Too big to fail”. The 2008 global financial crisis is essentially three interrelated financial crises; subprime lending crisis, housing crisis and the contraction of commercial lending within the banking industry.
The Subprime mortgage crisis is an ongoing financial crisis characterized by contracted liquidity in global credit markets and banking systems. A downturn in the housing market of the United States, risky practices in lending and borrowing, and excessive individual and corporate debt levels have caused multiple adverse effects on the world economy. The crisis, which has roots in the closing years of the 20th century but has become more apparent throughout 2007 and 2008, has passed through various stages exposing pervasive weaknesses in the global financial system and regulatory framework.
The main reason the subprime mortgage crisis happened is because credit was too available, and that was taken advantage of and credit balances exploded. Because of high housing inventories in 2006, and available credit, and the boom and bust in the housing market Americans spent $800 billion per year more than they earned. Household debt grew from $680 billion in 1974 to $14 trillion in 2008, with the total doubling since 2001. During 2008, the average U. S. household owned 13 credit cards, and 40 percent of them carried a balance, up from 6 percent in 1970.
At beginning of summer of 2006 surplus inventory of homes, causing home prices to decline significantly. Declining price attract people with the easy loan facilities of their banks. These people that were attracted to these homes were considered “subprime” or not considered idea candidates for a home loan. People who fell into this category either had a bad or low credit rating, bad credit repayment history and people who did not have a high enough income to support the loan.