Bankruptcy versus bailout

Henry Thompson



The market approach to business failure is bankruptcy.  Firms go bankrupt when they cannot pay their 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 reorganized.  Contrast that with the bumbling financial system bailout of Bush and Obama.  Bailouts are a tax on those who succeed.

The mortgage mess leading to the financial system bailouts in 2009 was a direct result of government meddling in the market.  Fannie Mae is a bankrupt government mortgage bank encouraging bad loans.  Freddie Mac sells mortgages without having to worry about making a profit.  The mortgage industry would be healthier without any of this government involvement.  The goal of the bailouts was to keep a few large banks and insurance companies in business.  Had these bankrupt firms simply dissolved, the great recession would have ended quickly.  Now these favored firms suffer from moral hazard knowing the government will bail them out.