Bankruptcy not Bailout
The market approach to a failed firm is to let it
go bankrupt. When firms do not have
enough revenue and cannot borrow to pay their bills, they should dissolve. Banks are one sort of business that can go
bankrupt. Banks make money borrowing
from lenders at a low interest rate and lending to borrowers at a higher
rate. When a bank makes too many bad
loans, it goes bankrupt. Insurance
companies help avoid risk by collecting premiums from customers and paying
those who have bad luck. If the incoming
premiums are less than the insurance company has to pay out, it should go
bankrupt. Bankruptcy laws guarantee
debtors and then stockholders are paid as much as possible. A bankrupt firm can reorganize. More efficient firms buy what is left and
reorganize. When the largest US energy
company Enron went bankrupt there not a ripple in energy markets.
Fannie Mae is a failed government bank
providing inefficient backing to mortgage banks, encouraging bad loans, and
elevating housing demand. Freddie Mac is
a government mortgage bank that sells mortgages without the usual restraint of
making a profit. Rising prices made home
buyers confident they could buy any house and sell it to the next greater
fool. The mortgage mess was a result of
government meddling. Taxpayers subsidize Fannie and Freddie. The mortgage business would be healthier with
no government involvement.
The bailout is a tax on those who paid
their mortgages. The goal of the bailout
is to keep a few large Wall Street banks, insurance companies, and a car
company or two in business. Had these
firms gone bankrupt, the economy would have recovered quickly.