Thursday, 30 October 2008

Stop worrying and learn to love bankruptcies

ManWearingBarrel A few weeks ago I suggested you stop worrying and learn to love economic depressionsDepression, I reminded you, is another word for recovery:

"This is a highly important point to grasp, the depression is the "recovery" process, and the end of the depression heralds the return to normal, and to optimum efficiency. The depression, then, far from being an evil scourge, is the necessary and beneficial return of the economy to normal after the distortions imposed by the earlier inflationary boom."

Now here's another piece of related advice: time to stop worrying and learn to embrace bankruptcies (just as long as they're not yours, of course).  Explains economist Henry Thompson, :

Bankruptcy is a normal part of economic life, covered by laws that guarantee stockholders will be compensated as much as possible. More efficient firms move in to take over what is left of bankrupt firms, buying what can be put to productive use. There is no crime in bankruptcy and, if handled quickly, little economic harm. The present financial problems would disappear quickly if the government let the markets operate and let inefficient firms go bankrupt.

Oh, and "deflation"?  For all the scariness that's attributed to deflation, that's just another word for "increased purchasing power." See, not so scary at all, huh?  Especially when you see what the Fed's been doing to combat deflation, which really is scary.


  1. Presumably bankruptcy is not such a good thing for the bankrupt, or the out of pocket creditors.

  2. Generally no. But the point here is a wider one: that the creditors and the bankrupt have malinvested, and while things are bad for those directly affected, the assets haven't disappeared -- they just go to new owners who have the opportunity of putting them to more profitable use, to the greater benefit of everyone.

    That's what's meant by the term "creative destruction."

    So the even wider point is this: if things are left alone and allowed to correct properly, the market will tend to reallocate resources away from their least valuable uses and into their higher valuable uses.

    Bailing out bankrupts will only slow down that process.

  3. As someone who has been an out of pocket creditor of a couple of chaps who have gone bankrupt, I always view it as dishonourable and agree that bankrupts should not be bailed out.

    Malinvestment...ha ha! (oh so true, alas!)


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