Bankruptcy is better than a bailout


Henry Thompson

 

 

The natural market approach to the failure of a business is bankruptcy.  When firms do not have enough revenue and cannot borrow to pay bills, they go bankrupt.  When a bank makes too many bad loans, it goes bankrupt.  If an insurance company has more payments to make than premiums it collects, it goes bankrupt.  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 hardly a ripple in energy markets as the market immediately reorganized. 

          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 worrying about making a profit.  The mortgage mess leading to the Great Recession of the late 2000s was a direct result of government meddling in mortgage and financial markets. 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 bailout is to keep a few Wall Street banks, some insurance companies, and a car company or two in business.  Had these bankrupt firms simply dissolved, the economy would have recovered quickly.