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Economist: Why Bankruptcy is Better than Wall Street Bailout

cnn.com — Congress has balked at the Bush administration's proposed $700 billion bailout of Wall Street. Under this plan, the Treasury would have bought the "troubled assets" of financial institutions in an attempt to avoid economic meltdown. This bailout was a terrible idea. Here's why.

Who dugg this? Made popular Sep 30, 2008

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  • nupr, on 09/29/2008, -22/+448Finally, the truth. I am a Libertarian and I'm glad this is coming out, look it up. Bankruptcy will fix this problem not paying all those who did all of this. Digg this up!
  • ToRoE, on 09/29/2008, -23/+343Regardless of party or affiliation, this just makes sense. DIGG - DIGG double digg.

    Keep politics out of the economy! The trouble we are in is not going away soon, and short term band-aids got us here in the first place.


    JUST LET THE FREE MARKET SORT THIS OUT!
  • DeadFox1, on 09/29/2008, -9/+213FTA:

    "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."

    This was nice to read.
  • metanoize, on 09/29/2008, -14/+182Say no to the bailout. This is the way to go.
  • algaeturd, on 09/29/2008, -8/+150Holy *****. Somebody making sense of this thing. EVERY American should read this whether they are for or against the bailout. It brings new perspective to the whole thing. Given, everyone has a different opinion but at this point, I personally think those who didn't vote for this and kept it from passing are American heroes.
  • Mookie5, on 09/29/2008, -6/+102This was a scary, but compelling argument to me.
  • richmomz, on 09/30/2008, -6/+88He's just a Harvard economist, what does he know? Bush says we gotta bail out the rich to save the middle class!!!
  • mcsenget, on 09/29/2008, -5/+83It's nice to see a professor who is a libertarian and understands free markets! Or history for that matter!
  • mrdeathgod, on 09/29/2008, -10/+81I say let the bankers and lenders go down in flames. They only have themselves to blame for creating this mess.
  • kerosion, on 09/29/2008, -4/+75As troubling as the implications for the economy may be, let's amputate the leg and cauterize the wound now. Not pump it full of more of what caused the damage and hope for the best.
  • tjordanchat, on 09/29/2008, -26/+82I have no problems bankrupting. Cash is a better way to go. It's healthy for the economy. Loans are are as healthy as cigarette smoke.
  • WWFP, on 09/29/2008, -7/+62Yes. This is how the market works, through the self-cleaning mechanism.
  • jwbraucht, on 09/29/2008, -2/+55FTA: "Further, the current credit freeze is likely due to Wall Street's hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents."

    I believe this is also why the market took a digger today. The "hope" (read: expectation) of a bailout by the government has buoyed prices and now they're adjusting to reality.

    There is a lot of money sitting on the sidelines waiting for this to all shake out. The investors will return once they feel the risk is worth the reward.
  • mfc5200, on 09/30/2008, -18/+69I posted this comment is response to someone saying something along the lines of "Bush is responsible for this, Obama has been right all along." I'm reposting this comment:

    I'm sorry. I can't stand this anymore. I don't even like McCain, but you guys have to get your facts straight.

    http://en.wikipedia.org/wiki/Community_Reinvestmen ...

    http://en.wikipedia.org/wiki/Image:Shiller_IE2_Fig ...

    That is a start.

    This bubble was a result of two things

    1) Government regulations that mandates banks to make subprime loans! See "Community Reinvestment Act"
    2) Easy credit as a result of the Federal Reserve lowering interest rates, which enabled poor people to get loans for houses they couldn't truly afford (at realistic interest rates and monthly payments)

    Back in first half of this decade, Bush and Co tried to regulate Fannie and Freddie, saying they were "getting too big" because of their government guarantee advantage. They were able to outbid their competitors. When the Republicans tried to create an agency to REGULATE THEM, the Democrats stopped them.

    http://query.nytimes.com/gst/fullpage.html?res=9E0 ...

    From the current Democratic Vanguard holder Barney Frank back in 2003":

    "These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.'' [for low-income earners]

    Once Obama joined the Senate, he also was highly critical of efforts to prevent Freddie and Fannie from engaging with low income risky borrowers.

    As such, he was one of the top receivers of donations from Freddie and Fannie.

    The Freddie-Fannie Five

    1. Sen. Dodd, Christopher J (D-CT) - $133,900
    2. Sen. Kerry, John (D-MA) — $111,000
    3. Sen. Obama, Barack (D-IL) - $105,849
    4. Sen. Clinton, Hillary (D-NY) - $75,550
    5. Rep. Kanjorski, Paul E (D-PA) - $65,500

    He wanted them NOT to be regulated, saying that would prevent poor people from receiving financing for their homes.

    So get your facts straights.

    In this clip, there is a video of Barney saying that he though Fannie/Freddie were stable, didn't need regulation, and that doing so would prevent poor people from getting housing.

    http://www.youtube.com/watch?v=cMnSp4qEXNM&NR=1

    These Democrats (not the party as a whole) are more responsible for this current mess than the Republicans. Get your facts straight.
  • TheCasablancan, on 09/30/2008, -2/+42That sucks for your mother. My parents have a more diversified portfolio, and while they will take a loss, they'll be pretty much fine. It's really just bad luck. No one wants those that we care about to come into harm's way, but what do you think would happen if Wall Street is bailed out and the value of the dollar devalues? Your grandmother loses all worth in her cash like the Iraqi Dinar did.

    But what if the companies go bankrupt, and she loses her retirement? If she's not too old, she can do a small amount of work. My 70 year old Grandmother works 20-30 hours per week in... one of those "Asian Stuff" Stores. Selling antiques, clothing, jewelry, etc. She doesn't do it because she HAS to. She does it because she wants to. It may not be a bad idea to consider that she may have to depend on you and your siblings (if you have any).

    You have my best wishes, regardless of what happens. I hope everything works out for the best for all of us.
  • CoopSa, on 09/30/2008, -4/+42The best thing for your mother is not necessarily the best thing for the economy. Anyone who pays attention should have their assets in low risk investments, especially if they are near retirement. That means bonds and money market, not stocks! And if you have a retirement account you need to pay attention. I'm in my 20's and this is one of the very first things I learned about my 401k. I also put it all into bonds and money market back in February and it hasn't lost any value since.
  • krapypunkguitr, on 09/29/2008, -8/+42Pure free market theories. Leave the market alone. and it will eventually correct itself.
  • funkedup, on 09/30/2008, -5/+38Agreed. Republicans and Democrats can both get bent.
  • incongruity, on 09/30/2008, -1/+33"Her crime? Investing in supposedly low-risk large-cap companies like EVERYONE NEAR RETIREMENT AGE IS TOLD TO DO!"

    Funny -- I've always heard that you were supposed to ALWAYS have a diversified portfolio... note, however, that diversified doesn't mean high risk, it means not putting all your money (or a big chunk of it) in a single stock or a single sector -- or, hell, in one thing, like stocks. If you came into this current mess diversified, you'd be doing okay now. If you didn't, you or your investment adviser screwed up and you have yourself to blame for not being on top of a relatively simple concept.

    Sorry, I know, this does suck for a lot of people and I worry about a large number of loved-ones in this current economic climate, but I just can't stand the rampant victim mentality that so many, like the above poster, always seem to wear (or push onto others).

  • fuzzmeister, on 09/30/2008, -7/+38Without loans, the entire economy would grind to a halt. Overeager lending is bad, but no lending means no economy.
  • staceZ, on 09/29/2008, -8/+38Economic Darwinism - survival of the fittest.
  • lolupissed, on 09/30/2008, -1/+31This bailout was a small victory in the war for liberty. Hopefully it gets shot down again.

    Wall Street is trading with there emotions right now, they are like a little kid that went to the toy store with there parents. They were expecting a toy but at the last minute their parents told them no and now they are throwing a fit.
  • Zomgondo, on 09/30/2008, -3/+32Exactly. Libertarians and liberals generally have the same goals in mind, we just disagree on the best way to achieve them. For example, I'm a liberal, and I strongly support the idea of meritocracy and self-reliance... I just happen to think that a good government needs to play a fairly strong role in making sure that we're all playing by the same rules, on the same field. Libertarians, on the other hand, are wary of governments getting drunk with power, which I can entirely understand.
  • LordSkywalker, on 09/30/2008, -9/+37So... basically what Ron Paul has been saying all along. No surprise there.
  • inactive, on 09/30/2008, -1/+28Libertarian and liberal ideals can indeed overlap, according to this handy chart:

    http://mysite.verizon.net/alankh/akhblog/SmallestQ ...
  • unknownsoldierX, on 09/30/2008, -7/+34So I suppose you'll be able to pay for your house with cash then?
  • inactive, on 09/30/2008, -4/+30Not long after the fed bailout of fred and fan, the rest of wall st asks for some of that free money. Coinkidink? I think not!
  • andyeddy, on 09/30/2008, -1/+24Don't confuse regulation with oversight-- we have laws against misleading investors. Regulation doesn't 'spot bad behavior and punish the guilty', our justice system does. Regulation, on the other hand, cripples the system and forces the market into an artificial and unstable equilibrium. Allow the market to regulate itself, and make sure business follow the law.
  • inactive, on 09/30/2008, -8/+31I agree that these companies should be allowed to go bankrupt. I disagree that subprime lending is what caused this collapse. We had a similar situation in the late 1980s when the housing market collapsed, but it didn't take down the financial markets other than the Savings and Loans that owned large amounts of bad mortgages.

    The problem this time around is the leveraging of debt, the CDS (credit default swap), the false accounting, and inflated assets. The subprime mortgages were just part of this huge fraud perpetrated by Wall St. to inflate their profits so that executives could cash in with huge bonuses.

    Don't try to blame this on the little guy, the people that created this crisis are the Wall St. fatcats. And they are the same ones that are going to benefit the most from the bailout.

    "Wall Street's gigantic Ponzi scheme"
    http://digg.com/business_finance/Wall_Street_s_gig ...
  • honeybrass, on 09/30/2008, -0/+20So you want to be inflated out of money instead? Either way, I'm sorry but you are going to lose. Everyone is losing due to this crisis, the bailout just shifts it so the public loses more long-term, shifting the rich-poor dichotomy further still.
  • TheOneKen, on 09/30/2008, -3/+23FDR's policies and the New Deal extended the Great Depression to 10-years, longer than any other depression or recession ever. We only left the depression upon ramping up our arms-based economy during WWII. Not what you learned in school, is it?
  • eviltandem, on 09/30/2008, -0/+18I invested in these little things called .com's.

    When they went bankrupt nobody gave me my money back. That's the risk you run when you invest.

    So explain to me why your mom deserves free money, but nobody else does.

    If she invested because she was told to perhaps the time has come for her to actualy learn how money and investments work before she gives her money to other people. It's not my responsibility to cover losses she incurs from ignorance.
  • tendonut, on 09/30/2008, -5/+23How long would it take for you to save up $200,000 cash for a typical house in the US? Sure, the average house is $70,000 where I live, but on average, if you were making $60,000 a year and trying to buy a $150,000 house, do you want to graduate college (paid for by cash you earned working part time? Good luck), wait a few years for that great job and live in your parents basement until you are 35? Sure, you'll be able to pay for that house in cash, but you will be living it in alone. If you got yourself an apartment, add on a few more years. 40 year old and buying your first house isn't very practical.

    Loans are a necessary evil. The trick is knowing when you can or cannot afford the premiums
  • kaplanfx, on 09/30/2008, -0/+18Purchasing securities is inherently risky. No one guarantees that you will make money. If that were the case we'd all be filthy rich. It sucks, but if you don't know the risks then don't invest.

    -kap
  • greeniemeani, on 09/30/2008, -3/+20Stop worrying about the temporary stock market woes, guys. The DOW is still OVER 9000!
  • Dumbledorito, on 09/30/2008, -4/+21Why does this analysis ignore how banks basically lied about how much their assets were? And sub-prime mortgages weren't just snapped up by the underclasses; lenders allowed people to lie about their incomes willy-nilly and then took these ***** loans and made "investment products" out of them. The SEC did nothing. The banks did nothing to stop the practice (and they well could have. Saying 'no' isn't hard), and Wall Street invested in them because "housing prices never go down."

    If the market worked the way these idealists claim it does, the investments in sub-prime mortgages would never have happened because they're an obvious bad risk.
  • rezist, on 09/30/2008, -5/+21I thought Digg was lost forever... but wow... a decent article hits the front page!
  • inactive, on 09/30/2008, -2/+18Adam Smith is rolling in his grave. I mean honestly, is it a free market or not? If is, then let the Invisible Hand do its job. If it is not, then let us drop all illusion of it being so and make everything state run.

    The Bail Out was a boondoggle to begin with. I'm glad at least some of our elected representatives realize that the torches and pitch forks are going to follow pretty soon if they don't start acting on behalf of the public good. They are even losing the military support, which would be comedy gold if it wasn't so deadly seroius.
  • ronaldinho, on 09/30/2008, -0/+15This was a succinct and concise article that also have a lot of punch. It made a great point saying that the government should never have had Fannie and Freddie in the first place, and the taxpayers cannot suffer when the government made a mistake in insisting on subprime lending. SImply put, not everyone can have a house. Period. There aren't enough resources. If you want a house, earn enough money.
  • Devilboy666, on 09/30/2008, -0/+15Yes make sure you guys keep phoning your reps! Democrat or Republican just keep phoning and mailing and tell them NO to the bailout.
  • inactive, on 09/30/2008, -0/+15I'd be willing to live with it getting worse before it gets better, as long as it really gets better in the end. Short term sacrifice in exchange for long term gain is a valid strategy.
  • Blandyman, on 09/30/2008, -18/+33My girlfriend's mom is in the same position.

    I don't know your mom, but I know her, so my only words were "Look, bitch-who-doesn't-accept-me, you shouldn't have put all your eggs in one basket. You ***** up and should've diversified."
  • patpl22391, on 09/30/2008, -3/+18It was Republicans who stopped this today.
  • Hangly, on 09/30/2008, -0/+14Responsible Republicans split with their neocon ***** leaders. I've been waiting to hear that for years.
  • brad3378, on 09/30/2008, -9/+23A libertarian with Obama on your profile?

    .........interesting.......

    Perhaps you misspelled "Liberal"?
  • justiceape, on 09/30/2008, -1/+15Ha ha, yeah, what's he know. He's just a Harvard economist. Seems the only people pushing the bailout are insiders like Paulson whose own firm has magically survived the crisis, and politicians. On the other side you have people who actually study the situation and don't stand to gain money from it (economists that aren't part of neocon or NWO think tanks), and the American people. Gee, let's think real hard who's right here. This man was one of 166 economists who wrote the letter saying "DON'T DO IT YOU MORONS!!!"
  • mahadiga, on 09/30/2008, -0/+14Bankruptcy:
    More Number of Business Opportunities for More People (Win-Win)

    Bailout:
    Fewer Number of Business Opportunities for Fewer People (Lose-Lose)
  • TheOneKen, on 09/30/2008, -1/+14The long-term harm to bailing out an economy is much worse than the short-term correction. We're going to be encouraging excessively risky behavior for decades, as well as paying the interest on the money we had to borrow to pay for the bailout. Neighborhood effects go both ways.
  • inactive, on 09/30/2008, -1/+14I just cannot support giving hundreds of billions of dollars to, well, BILLIONAIRES.


    It takes them only a couple of weeks to draw up a bill and vote on it to save the wealthiest people in the country, but they ignore the millions of regular people who went bankrupt because of this mess. Speaks volumes...

    Not that I support a bailout of either party, but for ***** sake, I definitely don't support giving billions to ***** rich people. Not to mention that it will make matters worse in the long run, whereas no bailout will only be a short term recession, one or two years. A serious recession, but not one that can't be fixed naturally.
  • Aljavar, on 09/30/2008, -6/+19Please get this information out to the public. Let's keep liberty and free enterprise alive.
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