Bankruptcy, not bailout, is the right answer (Miron)
September 30th, 2008 | Published in Economics, Politics, Quotes | 3 Comments
The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.
The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.
Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.
In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This “moral hazard” generates enormous distortions in an economy’s allocation of its financial resources….
Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.
Further, the current credit freeze is likely due to Wall Street’s hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents.
—Jeffrey A. Miron, “Bankruptcy, not bailout, is the right answer” (September 29, 2008)
September 30th, 2008 at 1:16 pm (#)
I can agree that there were many who “knowingly engaged in risky subprime lending.”
But when the government had an implicit guarantee behind those securities, it wasn’t nearly as irrational nor greedy as it appears at first glance.
I can certainly agree with the idea that “any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.” I think that should include a time-based goal to sell off all of Fannie Mae and Freddie Mac’s assets and shut them down for good.
September 30th, 2008 at 1:20 pm (#)
I wish I knew what was the right thing to do. It’s too complex — I can’t see far enough ahead to know what will happen whether there is a bailout or not. And it seems neither do the experts, because they’re all over the map about what will happen or won’t happen.
October 2nd, 2008 at 3:52 pm (#)
Bankruptcy will leave the shareholders holding the bag. Anyone with a pension plan, IRA, 401x, or 457 plan is a shareholder – meaning almost every person who is employed and earning over $30K per year.
Bailout will leave the taxpayers holding the bag – the ones who pay the most taxes, meaning every person who is employed and earning over $30K per year.
Either way, the same people will pay for this.
The real decision is whether we filter the funds through the government, or private capital markets.