Bankruptcy not Bailout


Henry Thompson

 

 

The market approach to business failure is bankruptcy.  When firms do not have enough revenue and cannot borrow to pay their bills, they should go bankrupt.  Banks can go bankrupt.  Banks make money borrowing from lenders at low interest rates and lending to borrowers at higher rates.  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.  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. 

          Fannie Mae is a bankrupt government bank providing inefficient mortgage backing, encouraging bad loans, and elevating housing demand.  Freddie Mac is a government mortgage bank that sells mortgages without the usual restraint worry of making a profit.  The mortgage mess was a direct result of government meddling. Taxpayers subsidize Fannie and Freddie.  The mortgage industry would be healthier with no government involvement.

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