Wednesday, December 17, 2008

Scourge of the bailouts

The scourge of the bailouts is that it helps an addict get deeper into the malaise. First it was the Wall Street Banks, then it’s the Big three and even Biotech companies in Britain that line up with hat in hand. John Grapper in his FT column hollers “it’s time we stop improvising our way out of trouble”.

Steven Horwitz, an economics professor at St. Lawrence University, got it right when he wrote, “There will be short-term pain if we don’t bail out these firms, but that is the hangover price we pay for 15 years or more of binge lending. The proposed bailout cannot prevent the pain of the hangover; it can only conceal it by shifting and dispersing it among the taxpayers and an economy weakened by the borrowing, taxing and/or inflation needed to pay for that $700 billion.”

I look at a basic aspect. Somebody makes a mistake, a very big mistake and everyone is made to suffer. How long can this amnesty go on? Call it moral hazard, but it’s perpetuation of the ineptitude. It’s like serving more booze to an alcoholic.

Take the big three case for bailout. Isn’t it better to float three new car companies with the money that they say they need? Doesn’t that make better sense? Buyout the assets of the existing companies in their bankruptcy proceedings (liquidation) and then rejuvenate them under a new name, minus the union commitments. The only commitment to the organized labor should be just jobs. No huge healthcare excess baggage or other perks for the wily top managements.

The only condition should be make profits and share the loot. I think that sounds more like it. Hank Paulson should be pleased.

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