Friday, October 17, 2008

Why Bankruptcy, not bailout, is the wrong answer

"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."

"The current mess would never have occurred in the absence of ill-conceived federal policies. The federal government chartered Fannie Mae in 1938 and Freddie Mac in 1970; these two mortgage lending institutions are at the centre of the crisis. The government implicitly promised these institutions that it would make good on their debts, so Fannie and Freddie took on huge amounts of excessive risk."

"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."

What Market really needs is MORALITY.
Market and business are not driven by emotions and religion, but need ethic rules, otherwise the total deregulation brings to the point we just reached: nobody believes in it.
It is true, Bankruptcy JUST means that shareholders typically get wiped out.
And shareholders are the ones who had no part in the cheating, who didn't know how their money was spent, the ones who trusted the companies and lent them their money.
If you wipe out the share holders you cut the economy at its roots.
No share holders, no money.
Where do you begin the new financial era?

If you want to rebuild first you have to rebuild trust.
And you rebuild trust showing that the shareholders' money is safe.

"The right view of the financial mess is that an enormous fraction of subprime lending should never have occurred in the first place. Someone has to pay for that."
Yes: the ones who made it happen.
Politicians, managers.

"That someone should not be, and does not need to be, the U.S. taxpayer."
The taxpayer has no choice.
Either you destroy the economy or you sacrifice what is left.
It is the main interest of the taxpayer to save the economy.
It is not a mere matter of this or that company going bankruptcy, it is a matter of the roots of our society going bust.
The "capitalistic society" is based on the capital.
If there is no capital there is no capitalistic society and the capital is the saving and the investing of the millions of tax payers, of workers that make a capitalistic nation.
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