| +1. Paul Krugman of the NY Times wrote extensively both during the crisis and since about the correct way to handle this situation: 1. Put the failing bank into "receivership". I.e., a "receiver" (temporary managerment) appointed by the government takes over the company and tries to salvage it. 2. Fire the original management team. I.e., the ones that got them into this mess with their excessive risktaking. Good. They should suffer the consequences of their bad management decisions. That's capitalism. 3. Take on whatever additional debt or equity financing is necessary to turn the company around - without paying any regard to the positions or desires of the current stockholders. The current stockholders' positions' will likely get diluted to nearly worthless. Good. They should suffer the consequences of their bad investing decisions. That's capitalism. 4. After the company is turned around, take it out from under government receivership, hire a new management, and (if needed/appropriate) launch it public again via an IPO. There's a long, established history for handling failed banks this way (read up on the S&L Crisis), and it's the proper way to keep an institution alive and out of bankruptcy, without rewarding the management and stockholders who brought it to bankruptcy in the first place. Krugman often pointed out, though, that the Obama administration was too scared to go this route - perhaps because they were worried about the absurd accusations of "socialism" that the Psychotic Right would undoubtably have started screaming about. So instead, they chose to reward the management and shareholders that caused the problem, by using government money to help prop up the value in their worthless company. Moral hazard indeed! Privatize all the profits, but give all the losses to the public. And socialism is the evil here?!?!?!? |
The fact is we'll never know what would have happened if large companies were allowed to fail, because they weren't. It might have been worse, it might have been better. For sure it would have been worse in the short term, but these issues should be measured over the medium to long term. One of the messages that has been sent out with the current handling is that there is a Fed put on any high risk adventure, and that's not good.
Personally I think that there is something to be said for the 'bandaid' approach. Not sticking something over the top to cover the problems, but a short sharp shock of pulling it off and let the problems be.
The problem with the bailouts is that they cover over the fact that some companies were allowed to fail. Lehman, for one. And the world didn't stop turning. Sure, this caused liquidity problems and risk premiums to escalate dramatically, to the detriment of employment and the real economy. But it's foolish to pretend that this isn't going to happen anyway. The problem with Krugman and others is that they believe a lack of demand is the problem. They view the problem through this prism, and as such they come up with solutions that match their world view.
Others (including me) say that perhaps the problem is excessive debt. And until that excessive debt is eliminated from the system, productive companies are unable to make use of the resources tied up in the unproductive ones currently taking shelter with public money. You say the institutions should be kept alive, I say that they should be destroyed and the buildings and staff and infrastructure released to new institutions who can find a way to be competitive.
I believe you shouldn't look at the problem in terms of a company or bank failing. That's just the symptom. Once the debt had built up excessively, it was only a matter of time and method for the companies to fail. The problem was watering down of regulation that had stood the test of time for 70 years, and regulators becoming toothless. So far, this hasn't been fixed.
This is a not a left/right blue/red debate. It is a debate as to the level that central governments should take in directing and manipulating markets. Neither 'side' is debating this. Nobody will try and defend central planning and a command economy, because it is comprehensively proven as a failed model, yet we seem to be reversing backwards into this situation on the say-so of a bunch of people who couldn't see the problems headed their way. They don't seem to realise that controlling the fundamentals of money (supply and price) causes wrong investment choices through inappropriate price signalling. And then they try and correct those choices by further fiddling with central control instead of letting the chips fall where they will fall. Because they're going to do this eventually - no amount of bailing out will fix a fundamentally out-of-date business model.