The Case Against Bailouts

I've seen pieces of it here and there, but this is probably the best one from a technical difficulty standpoint:

It strikes me that this episode illustrates the inherent evils of a bailout. There really are no rules; the government pumped many billions into AIG, but the company and its new "owners," the taxpayers, are making it up as they go along. AIG is likely right in saying it is obligated to pay the bonuses, but the public is also right in believing a bailout shouldn't work this way. The problem is that we have no established rules to govern bailouts.

Which is one basic reason why bankruptcy is far preferable. Bankruptcy has reasonably clear rules that have been developed over many years. The bankrupt company is run for the benefit of its creditors, or, if appropriate, shut down. The creditors decide whether to keep existing management on. Executory contracts can be accepted or rejected; labor and supply agreements can be renegotiated. A judge presides so that disputes can be fairly resolved.

A bailout is an ill-defined procedure in which no one's rights are clear, and political calculation counts for more than fairness or transparency. The flap over AIG bonuses is just one of many that we can expect to arise if we continue down the path of endless bailouts, rather than allowing insolvent companies and their creditors and investors to pay the price of that insolvency.

We really do have things in place to take care of bad businesses. And propping up anything that is 'too big to fail' (or worse in the case of the Big Three Auto makers 'too important to fail') just guarantees that important lessons won't be learned and that unreasonable risks will still be taken. Even worse, it stops the market from correcting and just makes for a bigger problem down the road.
I haven't blogged much about Obama yet. There is an entirely reasonable 'wait and see' approach that seems to be going on in the American public's minds right now. But I do have one serious bone to pick with him. He has enormous political capital right now and he seems to be afraid to spend any of it to make the hard choices needed to help the economy. That needs to change and soon or recovery will simply be an even harder road.