Tuesday, September 30, 2008

Credit Crisis Critique

Just read a fantastic editorial by Jeffrey A. Miron, senior lecturer in economics at Harvard University, criticizing the credit bailout proposal. Some excerpts:

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.

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.
Let the failing businesses fail. Successful ones will rise. Keep our markets free.

1 comment:

msheeley said...

"Successful ones will rise"

Mike,
This is true, but the question is how long will it take for them to rise? a year? 2 years? 10 years? Do you really want to live in really bad economic conditions for that long?

If Warren Buffett thinks now is a good time to buy in, then why can't the US people also take part in these purchases? Can't governments take part in the free markets?

We could just let the Warren Buffetts of the world buy our financial service businesses and thus provide these businesses the cash they need now. But even Buffett could only crap together $10B.

If there were 70 other Warren Buffetts around then maybe the free markets would have a chance in the short term (1 to 2 years) but unfortunately there is only one organization that can inject enough cash into these businesses to get them up and running again. That is the US Government.