Posted by
Philip D. Nathanson on Wednesday, November 12, 2008 1:30:54 PM
Let's start with the obvious - the U.S. government bailout program has noticeably worsened our economic prospects. Without the program AIG would have declared bankruptcy. This would have tested the often-stated hypothesis that we must bail out firms like AIG because they are too big to fail. We have been told that if they fail, they will drag down everyone else with catastrophic impact. While this is an effective scare tactic, there has been no detailed reasoning presented to support this view and its validity is dubious. There have been spectacular collapses throughout our history with recovery in due course, even without the many monetary and fiscal tools available today. There would be short-term pain associated with adjustment via bankruptcy, but at least we would be on the road to recovery. Instead, the U.S. and world stock markets are being decimated with little or no progress toward resolving prior excess.
Certainly the United States could survive the bankruptcies of Bear, Stearns, Lehman, AIG, Fannie Mae and Freddie Mac. Their assets and resources would not vanish. Healthy divisions would be sold as happened with Lehman. Their other assets and many workers would go to other employers. In contrast, the bailout of AIG has been a mess. It was supposed to have led to rapid sales of some business units to pay back the government loan, but this has not happened. Instead, productive employees are no doubt looking to jump ship as competitors take away market share.
Bankruptcy can be complex and take an extended period to final resolution. But history has shown that a free market solution will unwind prior excesses in the most efficient manner. While a government-directed bailout can spread out the pain, it will be far costlier and delay the necessary adjustments. As the Wall Street Journal recently editorialized, the government has now bailed out the original bailout of AIG by expanding its aid from $85 billion to $150 billion as well as easing the terms of the loan. Is anyone surprised?
The next test on the horizon is the impending collapse of the "big three" auto companies ... General Motors, Ford and Chrysler. Again, the argument is being presented that they are "too big to fail." Clearly this is untrue. It is instead a choice between two alternatives, a political solution in the form of a bailout or an economic solution via bankruptcy reorganization. The latter is the free-market corrective. It is the only course that can lead to long-term growth prospects for these companies if they restructure with new management and competitive labor contracts.
The stock market is sending two messages. First, it is voting no confidence in the bloated "New Deal" remedies of Ben Bernanke, Henry Paulson and Congress that are causing an economic downturn. Second, it is saying that the real economic cost of the bailout will be much greater than the projected $700 billion in direct expenditures. We face years of government interference via credit allocation, pay scale determination and a host of explicit and implicit new regulations. All will lead to a massive mis-allocation of resources. The U.S. stock market has fallen about $5 trillion in value the past two months. This is its estimate of the direct and indirect costs of the current "rescue" program.