Bankruptcy, not bailout, is the right answer

Economist Jeffrey Miron hits the nail on the head -

<snip> 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.

Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.

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.

Thoughtful advocates of the bailout might concede this perspective, but they argue that a bailout is necessary to prevent economic collapse. According to this view, lenders are not making loans, even for worthy projects, because they cannot get capital. This view has a grain of truth; if the bailout does not occur, more bankruptcies are possible and credit conditions may worsen for a time.

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.

</snip>

http://www.cnn.com/2008/POLITICS/09/29/miron.bailout/index.html

Here I was, all scared I might lose my life savings, my house, and my investments. But, if my bank just goes bankrupt, and so does my broker, and so does my lender, then I'll be just fine! And, me and all my friends, some of whom work in the financial, real estate, construction, consulting, and manufacturing industries...we'll all be just fine, right? Hooray!

Nothing that happens on mysterious Wall Street EVER has any effect on the rest of America!

Thanks, Jeffrey Miron! Gee, I sure do hope all these high-paid economists on TV come out of this crisis all right...!

Your take is far too simplistic. The securities will be bought up - it's just a matter of BY WHOM, and AT WHAT PRICE.

If your lender goes under, nothing happens. Someone else gets your mortgage, you keep paying it. If your broker is in danger of going bankrupt, you get to move your investments elsewhere first if you're paying attention, so you'd only have yourself to blame if that got fouled up. You can see your bank's rating, and change banks if you're at risk there - again as long as you're willing to pay attention rather than hoping that the government will make everything safe for everyone. Plus, you've got the FDIC insuring your life savings (though depending on the size you can't put them all in one basket).

Everyone is going to be in for a hard ride, in all industries, no matter how this shakes out. And yes - everyone WILL be just fine, if they watch themselves, help each other, and don't sit in a corner whimpering and hoping that the Bushies will make it all magically better through supply-side economics - which is what this bailout is all about. People have the choice to play victim, or fight for the government to do the right thing while setting themselves up for a softer fall if despite their best efforts they're in for a surprise.

We're screwed either way though. Major stagflation if it doesn't pass, and extreme hyperinflation if it does. I'm inclined to choose the one that doesn't involve a 700 billion dollar giveaway to Bu$hco cronies.