5 ms·

This is how capitalism is supposed to work. If a firm goes bankrupt, just let it fail. Might bring some short term pain, but it creates a healthier economy in

by Mikeb85 13y ago

This is how capitalism is supposed to work. If a firm goes bankrupt, just let it fail. Might bring some short term pain, but it creates a healthier economy in the long run. Bailouts are contrary to the spirit of capitalism.

rosser 13y ago
Bailouts are contrary to the spirit of capitalism. Someone should explain that to what passes for capitalists nowadays.
- Mikeb85 13y ago
  You might call that crony capitalism. In non-western countries giving money to an official in return for favourable economic conditions is called a bribe, in the US, Canada and Europe it's called 'lobbying'.
  - ergoproxy 13y ago
    The terms crony-capitalism, klepto-capitalism, and casino-capitalism are all very descriptive of the US economic system, which has become like a bad Yakov Smirnoff joke: "In America, bank robs you!" So what's happened to the $85 billion a month ($1 trillion a year) that Ben Bernake has pumped into the banks in the last year, during the third round of quantitative easing (QE3)? "It all got bottled up in the banks, and essentially none of it ... got lent out." Source: http://www.npr.org/2013/12/17/251796694/year-in-numbers-the-federal-reserves-85-billion-question http://www.npr.org/2013/12/17/251796694/year-in-numbers-the-...
    - bubbleRefuge 13y ago
      QE as any kind of remedy is a farce. At best it has a kind of placebo effect on the stock market. In reality, with QE the Fed exchanges reserve deposits for treasury securities to execute policy aimed at lowering longer term rates which is supposed to increase demand for loans. Those reserve deposits are not lent out because reserve deposits are never lent out. Reserve deposits are used for interbank settlement.
  - Tycho 13y ago
    Bailoutism.
jordanb 13y ago
Problem is, that was exactly what drove policy in the United States between 1929 and 1933. In the mean time, lending disappeared which caused grave liquidity problems for otherwise solvent firms both in the financial sector and in the "real economy." Those firms failed to meet their obligations producing a chain reaction which continued until severe government intervention put a stop to it years later. Bernanke and many others were playing off the 1933 script in 2008. Bernanke himself had actually written a book about the Great Depression. I'm not at all happy with what has happened on wall street since 2008 but Bernanke and many others were operating in good faith trying to prevent a catastrophe. There is really no parallel between the USA (in 2008 or 1929) and Iceland in 2008. In the case of Iceland, you have a series of hedge funds, basically, domiciled in Iceland but speculating on foreign securities using foreign capital. They had little to do with cod fishing or hot springs or aluminum smelting but when they exploded, the foreign bondholders wagged their fingers at Iceland and said "this is your problem now, you fix it." Icelanders wisely said "no," they opted not to impoverish themselves to make good the debts of local private hedge funds to the foreign speculators.
- burntsushi 13y ago
  > Problem is, that was exactly what drove policy in the United States between 1929 and 1933. I don't understand how people think that the policy during 1929-1933 was "do nothing" when the following things occurred during that time period: Smoot-Hawley Tariff Act, Glass-Steagall Act, the Federal Home Loan Bank Act, the Emergency Relief and Construction Act, the Reconstruction Finance Corporation, the Hoover Dam(!), and more. Despite Hoover stating that he wanted less government intervention, that isn't actually what happened. Basically, the notion that "we did nothing" during 1929-1933 (as you've suggested) is a giant misconception that really needs to die. You can read more about it here: http://en.wikipedia.org/wiki/Herbert_Hoover#Great_Depression http://en.wikipedia.org/wiki/Herbert_Hoover#Great_Depression N.B. I don't claim that these policies were effective. Just that "nothing" is far from the truth.
  - jordanb 13y ago
    The Glass-Steagall Act, at least, what people mean when they say "Glass-Steagall" was passed in 1933 and signed by FDR.[0] You are correct, of course that Hoover didn't "fiddle while Rome burned" but fiscal policy was largely non-interventionist and monetary policy tight until the Emergency Banking Act of 1933[1] which was the "severe government intervention" I mentioned in the OP. [0] http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Legislation http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Legislat... [1] http://en.wikipedia.org/wiki/Emergency_Banking_Act http://en.wikipedia.org/wiki/Emergency_Banking_Act
hessenwolf 13y ago
That's not really true. Companies regulated under Solvency II will require sufficient capital to survive a 1 in 200 years worst case event. Sort of (but not really), 1 in 200 companies will face death-knell liquidity crisis every year. The question is, what do we do then? Do we let a company that took 50 years to build up fail? It is so easy to destroy something, and such a pain in the ass to build it. Maybe the idea instead is to make it such that we only have to bail out a portion of the 1 in 200 companies that fail each year? The portion that should be considered a going concern. What about General Motors? That is an incredible wealth-generating asset. A blip in the cash-flow statement could have made that into 1-2% of its productive capability, but the US didn't let that go down.
- icelancer 13y ago
  >What about General Motors? That is an incredible wealth-generating asset. A blip in the cash-flow statement could have made that into 1-2% of its productive capability, but the US didn't let that go down. You make it sound like GM had no control over it. And that additionally, when a company goes bankrupt, all the wealth just disappears into thin air. Neither is true.
  - hessenwolf 13y ago
    It does not disappear into thin air, in the same way the rubber from a burst balloon can still be used to tie your hair back (but not as severe, and the recovery rate might be as high as 60%, but I would suspect very, very much lower in the case of a fire-sale of GM's assets)
- marcosdumay 13y ago
  > The question is, what do we do then? Do we let a company that took 50 years to build up fail? It is so easy to destroy something, and such a pain in the ass to build it. What's the alternative? Tax people and give their money to the aristocracy (because you just created one)?
  - hessenwolf 13y ago

by Mikeb85 13y ago

rosser 13y ago

Bailouts are contrary to the spirit of capitalism. Someone should explain that to what passes for capitalists nowadays.

Mikeb85 13y ago
You might call that crony capitalism. In non-western countries giving money to an official in return for favourable economic conditions is called a bribe, in the US, Canada and Europe it's called 'lobbying'.
- ergoproxy 13y ago
  The terms crony-capitalism, klepto-capitalism, and casino-capitalism are all very descriptive of the US economic system, which has become like a bad Yakov Smirnoff joke: "In America, bank robs you!" So what's happened to the $85 billion a month ($1 trillion a year) that Ben Bernake has pumped into the banks in the last year, during the third round of quantitative easing (QE3)? "It all got bottled up in the banks, and essentially none of it ... got lent out." Source: http://www.npr.org/2013/12/17/251796694/year-in-numbers-the-federal-reserves-85-billion-question http://www.npr.org/2013/12/17/251796694/year-in-numbers-the-...
  - bubbleRefuge 13y ago
    QE as any kind of remedy is a farce. At best it has a kind of placebo effect on the stock market. In reality, with QE the Fed exchanges reserve deposits for treasury securities to execute policy aimed at lowering longer term rates which is supposed to increase demand for loans. Those reserve deposits are not lent out because reserve deposits are never lent out. Reserve deposits are used for interbank settlement.
- Tycho 13y ago
  Bailoutism.

jordanb 13y ago

Problem is, that was exactly what drove policy in the United States between 1929 and 1933. In the mean time, lending disappeared which caused grave liquidity problems for otherwise solvent firms both in the financial sector and in the "real economy." Those firms failed to meet their obligations producing a chain reaction which continued until severe government intervention put a stop to it years later. Bernanke and many others were playing off the 1933 script in 2008. Bernanke himself had actually written a book about the Great Depression. I'm not at all happy with what has happened on wall street since 2008 but Bernanke and many others were operating in good faith trying to prevent a catastrophe. There is really no parallel between the USA (in 2008 or 1929) and Iceland in 2008. In the case of Iceland, you have a series of hedge funds, basically, domiciled in Iceland but speculating on foreign securities using foreign capital. They had little to do with cod fishing or hot springs or aluminum smelting but when they exploded, the foreign bondholders wagged their fingers at Iceland and said "this is your problem now, you fix it." Icelanders wisely said "no," they opted not to impoverish themselves to make good the debts of local private hedge funds to the foreign speculators.

burntsushi 13y ago
> Problem is, that was exactly what drove policy in the United States between 1929 and 1933. I don't understand how people think that the policy during 1929-1933 was "do nothing" when the following things occurred during that time period: Smoot-Hawley Tariff Act, Glass-Steagall Act, the Federal Home Loan Bank Act, the Emergency Relief and Construction Act, the Reconstruction Finance Corporation, the Hoover Dam(!), and more. Despite Hoover stating that he wanted less government intervention, that isn't actually what happened. Basically, the notion that "we did nothing" during 1929-1933 (as you've suggested) is a giant misconception that really needs to die. You can read more about it here: http://en.wikipedia.org/wiki/Herbert_Hoover#Great_Depression http://en.wikipedia.org/wiki/Herbert_Hoover#Great_Depression N.B. I don't claim that these policies were effective. Just that "nothing" is far from the truth.
- jordanb 13y ago
  The Glass-Steagall Act, at least, what people mean when they say "Glass-Steagall" was passed in 1933 and signed by FDR.[0] You are correct, of course that Hoover didn't "fiddle while Rome burned" but fiscal policy was largely non-interventionist and monetary policy tight until the Emergency Banking Act of 1933[1] which was the "severe government intervention" I mentioned in the OP. [0] http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Legislation http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Legislat... [1] http://en.wikipedia.org/wiki/Emergency_Banking_Act http://en.wikipedia.org/wiki/Emergency_Banking_Act

hessenwolf 13y ago

That's not really true. Companies regulated under Solvency II will require sufficient capital to survive a 1 in 200 years worst case event. Sort of (but not really), 1 in 200 companies will face death-knell liquidity crisis every year. The question is, what do we do then? Do we let a company that took 50 years to build up fail? It is so easy to destroy something, and such a pain in the ass to build it. Maybe the idea instead is to make it such that we only have to bail out a portion of the 1 in 200 companies that fail each year? The portion that should be considered a going concern. What about General Motors? That is an incredible wealth-generating asset. A blip in the cash-flow statement could have made that into 1-2% of its productive capability, but the US didn't let that go down.

icelancer 13y ago
>What about General Motors? That is an incredible wealth-generating asset. A blip in the cash-flow statement could have made that into 1-2% of its productive capability, but the US didn't let that go down. You make it sound like GM had no control over it. And that additionally, when a company goes bankrupt, all the wealth just disappears into thin air. Neither is true.
- hessenwolf 13y ago
  It does not disappear into thin air, in the same way the rubber from a burst balloon can still be used to tie your hair back (but not as severe, and the recovery rate might be as high as 60%, but I would suspect very, very much lower in the case of a fire-sale of GM's assets)
marcosdumay 13y ago
> The question is, what do we do then? Do we let a company that took 50 years to build up fail? It is so easy to destroy something, and such a pain in the ass to build it. What's the alternative? Tax people and give their money to the aristocracy (because you just created one)?
- hessenwolf 13y ago