Bankruptcy is better than a bailout


Henry Thompson

 

 

The market approach to business failure is bankruptcy.  Firms go bankrupt when they do not have enough revenue and cannot borrow to pay bills.  Bankruptcy laws guarantee bondholders and then stockholders are paid as much as possible from the liquidated assets of a bankrupt firm.  More efficient firms buy what is left and reorganize.  When the largest US energy company Enron went bankrupt there was not a ripple in energy markets as the industry immediately reorganized.  Contrast that with the bumbling financial system bailout of Bush/Obama.

The mortgage mess leading to the Great Recession of the late 2000s was a direct result of government meddling in mortgage and financial markets.  Fannie Mae is a bankrupt government mortgage bank encouraging bad loans.  Freddie Mac sells mortgages without worrying about making a profit.  The mortgage industry would be healthier with no government involvement.

Bank bailouts are a tax on those who paid their mortgages.  The goal of the bailouts is to keep a few Wall Street banks, some insurance companies, and a car company or two in business.  Had these bankrupt firms dissolved, the Great Recession would have ended quickly.