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Monday, September 29, 2008

Bankruptcy Not Bail Out

I am beginning to side with the no bail out crowd.

This article by Jeffrey A. Miron is an understandable, working man's description of why we do not need the bail out.

I am in a curious dilemma. On one hand the bail out failed as a result of Republicans voting nay and voting against McCain's wishes that they vote yes.

McCain comes off looking bad because he can't corral his side of the aisle. So he loses points as a leader.

Its a double bonus day, no bail out, McCain sinks. Yet we are faced with another problem. Obama was for the bail out. Hm.

I am reminded of Democrats voting for Kerry in 2004 because he was going to manage the war in Iraq better than Bush. Kerry was superior to Bush and was the right choice, but Kerry needed to stick with a get out of Iraq policy.

There is compromise that we assume with every candidate. Voting for McCain is an extremely bad choice, voting for Obama is still the superior choice.

Addendum: Is it possible that the Democrats have actually pulled off a political jujitsu? They side with Bush, they know Republicans in the House are opposed, they know McCain is claiming leadership rights and wants a yes, the bill tanks, America blames McCain. Nah, that would be too clever.

CNN: Bankruptcy, not bailout, is the right answer
The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.

In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This "moral hazard" generates enormous distortions in an economy's allocation of its financial resources.

Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.

Further, the current credit freeze is likely due to Wall Street's hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents.

The costs of the bailout, moreover, are almost certainly being understated.

3 comments:

Glynn Kalara said...

The failed banks brought this disaster on themselves. It's not the end of the world. The institutions that have stocked up on the crap these failed banks were selling will also tank again other wiser business people will buy them out. This is not 1932. Thank God for FDR many of his reforms are still protecting us. What we've seen is what happens when you remove some like the Glass-Steagal act. In 4 mos. we'll have a new regime with people placed in the regulatory agencies that will do there jobs. In the mean time we'll have to muddle through.

Jim Sande said...

What you are writing sounds reasonable to me. At the heart of the matter we don't want Bush involved with this bail out stuff. Whatever drugs he's on that make him all red and zombie like should just continue till he ungraciously leaves.

The banks that bought up the bad mortgages and wrote the stuff, let them sink. If you can't afford to buy a house, that's one thing. But if you can't afford it because the ARM has made it unbelievably high, that's a problem that can be fixed.

Other than that flush it all.

Glynn Kalara said...

Yes, the next sound we all will hear will be the sound of a big FLUSH as the people who brought this on all of us go down the drain. Will there be suffering, yes that cannot be avoided. It really was more a matter of not allowing the arrogant bastards who created this mess to be allowed to profit by it. Plus, in one of the more ironic moments in American history we see the party of the sitting president flipping him a good-bye bird. BV$H betrayed them and has watched as many of these men & women have or are about to lose their seats. He's used and abused everyone for his own benefit and the benefit of a few. Good riddance! The first victim of his failed presidency will be Mcsame and this will happen because he sold his soul and will soon have ashes in it's place. As for the gutless hapless Dems. they did what they've been doing all along haven't they? Not able to be the opposition even on this loser of an issue these cowards end up having to watch as the GOP itself is forced to walk away from this bad deal. This leaves Obama with a real problem because if the Dems. are now going to simply replace the GOP as the flunkies and whores of the these same men we all still have a really big problem don't we?