The Shotgun Blog
Tuesday, January 27, 2009
Budget anticipation: Are bankruptcies bad for the economy?
The federal budget will be released later today. Most free market analysts and small government supporters are expecting the worst, especially since the Stephen Harper-led Conservative Party has already released the news that we will be staring down a $34 billion dollar deficit this year, followed by a $30 billion dollar deficit next year (not all the news is frightful, however, witness this proposal amongst the disaster).
What's motivating governments to act so recklessly? At least part of the explanation is an appreciation for Keynesian spend, spend, spend economics (even though tax cuts win). But we shouldn't overlook the desire amongst governments not to see any businesses become bankrupt, especially politically favoured businesses like the big three automakers.
Bankruptcies, however, are crucial to the proper functioning of a market. Or so argues Le Quebecois Libre's English editor Bradley Doucet in his column entitled "Illiberal beliefs: Bankruptcies are bad for the economy."
Doucet runs a series on Le Quebecois Libre undermining fashionable, illiberal beliefs (read: myths). Doucet thinks the battle for freedom is won not with guns (although they help), but with ideas. And his latest piece is necessary reading for those of us who are suffering under the illusion that businesses going bankrupt is nothing but bad news for the economy.
Here's an excerpt:
The thing to notice is that, painful as it is, bankruptcy is just the market's way of correcting itself. Economic players have been acting in disregard of reality, and this has consequences. Bankruptcy is a serious form of market correction, but like all market corrections, when it is necessary, it is necessary.
Bailing out an enterprise that should by all rights be allowed to fail is just an attempt to deny reality. It punishes hardworking taxpayers and efficiently-run businesses for the sins of overpaid union members and inefficiently-run businesses. It also sets up an unhealthy spiral, in which those who act recklessly are not held to account, encouraging them to continue to act recklessly in the future. It is corporate welfare at its worst, even though some of the benefits redound to privileged union members at the expense of all other workers.
Many successful businessmen have experienced a bankrupcy at some point in their business careers. It's an expeience that makes them stronger. I've never fallen over the edge, but I've dangled a few times. Fighting to survive causes some synapse connections that help you make better decisions in the future.
Posted by: dp | 2009-01-27 10:11:46 AM
The "financial experts" wll lead us back to "prosperity." Just listen to them!!!
A Market Discussion By the “Financial Experts”
By Stephen J. Gray
“Financial experts” have been telling us recently where “the market” is headed. The favorite words of the B.S. merchants (politicians included--listen next time you see or hear them) are these: “As we go forward,” or “Moving forward.” Here is some of their “wisdom” on “going forward.” But what does it all mean?
B.S.T.V. News interviews two financial experts on where the market is going:
Interviewer: “I have Charlie Con-them and Bertha Baloney from Offshore World Market Financial Services and Banking to help you invest in the new year. Charlie, where do you see or believe we are headed?”
Charlie Con-them: “I would say now is the time to buy as we go forward.”
Interviewer: “Why Charlie?”
Charlie Con-them: “This downward spiral, I believe, is nearing its lowest point; therefore, the only way to go is up.”
Interviewer: “That seems like a good point, Charlie, but is that necessarily true?”
Charlie Con-them: “In my view it’s true. You have to get the people back into the markets; being positive sells and the market needs and feeds off their money.”
Interviewer: “Charlie, you are a beacon of hope. Now over to Bertha: what’s your take on the market?”
Bertha Baloney: “There is a lot of negativity out there but this can be balanced by having a positive attitude to one’s losses as we go forward.”
Interviewer: “Are you telling the people who have lost money and whose investments and pensions have tanked to be positive then, as they go forward?”
Bertha Baloney: “That’s what I’m saying. Every downturn has an upturn. Moving forward is the only answer.”
Interviewer: “Wow! Well said, Bertha. I’m sure our viewers are pleased to hear that going forward is the solution. Charlie, can you give us a sense going forward of when the upturn will be?”
Charlie Con-them: “I see it happening right now, but it is an invisible rise that comes to fruition through confidence as we go forward.”
Interviewer: “So Charlie you would say going forward is important?”
Charlie Con-them: “Hell, if we can’t go forward where else can we go? We must go forward and move on to success.”
Interviewer: “Bertha, do you see us moving forward to success?”
Bertha Baloney: “Success is just around the corner. Therefore as we move forward it will meet us face to face.”
Interviewer: “Bertha, your financial wisdom never ceases to amaze me. So your message is this then: Success is staring us in the face going forward.”
Bertha Baloney: “Not only that, it is here. And it will take us forward into the future.”
Interviewer: “The future is going forward, as you say, Bertha. But do we learn anything by looking back? Anyway, what’s your take Charlie?”
Charlie Con-them: “My take has been exceptionally good. It’s the best year I ever had selling financial toxic paper, and getting huge fees for doing so ”
Interviewer: “Charlie, I meant your take on looking back.”
Charlie Con-them: Looking back, I would say this downturn has been good for us. I am taking a sabbatical in the sun and waiting for my next opportunity to consolidate my gains as soon as the stiffs, oops, I mean the players, get back into the market. But, I digress. governments have seen the value of the free markets and are now bailing them out. This should tell the people that their tax dollars are safe with us, as we move forward.”
Interviewer: “Spoken like a true financial expert, Charlie. What do you think Bertha?”
Bertha Baloney: “Government money is a boon to the markets, and at least we don’t have to worry about socialism. So, I say free markets and taxpayers’ money is a great combination; it’s a win-win situation for us. We must be forward-looking at all costs.”
Interviewer: “So what would you say to the losers out there, whose costs have been enormous?”
Bertha Baloney: “Cheer up. Have faith in the market; it needs your support at this time, as we travel forward.”
Interviewer: “Final word to you Charlie.”
Charlie Con-them: “I say let the marketplace decide and God Bless the taxpayers as we go forward.”
Stephen J. Gray
January 27, 2009.
[email protected] website: http://www.geocities.com/graysinfo
Posted by: Stephen J. Gray | 2009-01-27 10:14:52 AM
Obviously what doesn't hurt the economy is letting the risk taker take the brunt of his failure. He will either learn that he is not a good businessman and find regular employment, or learn from some mistakes and do right the next time. Allowing him to benefit from the wrong product, wrong approach, ect will only encourage capital being wasted rather than functioning to increase collective prosperity.
Posted by: Faramir | 2009-01-27 12:04:01 PM
Budget anticipation: Are bankruptcies bad for the economy?
No more so than , say, cancer is bad for your body when its happening en masse.
Although many successful entrepeneurs have hit that pot hole on the road to success.
Posted by: JC | 2009-01-27 12:23:36 PM
I think that's a key point. In a properly-functioning economy some businesses will succeed and others will fail, but there is ideally a semblance of equilibrium where the winners and the losers tend to balance each other out, all other things being equal, in theory, your mileage may vary, etc. But the economic freefall we're living through indicates that the economy is not functioning properly. Past government interventions to encourage risky lending, etc, caused a bubble which inevitably burst. It would be disingenuous for a government to simply say to the public, "this is normal. This is proper. Just go about your business," when it clearly ISN'T normal. It would be disastrous for any government to just sit back and allow bankruptcy on such a large scale. Now, I'm not trying to apologize for big-spending, big-deficit, cash give-aways. But I would like to hear suggestions on a better strategy for the federal government that takes into account 1) the realities of a minority parliament, and 2) economic factors that are largely outside their control, and 3) fundamental errors by previous governments that simply cannot be reversed over the short term without major economic and political pain. I understand the temptation to say, "fall on your sword and let the other guys deal with this mess." But the other guys have a nasty habit of holding on to power for a lot longer than one expects, and passing laws through parliament that one couldn't even imagine.
Posted by: anonymous | 2009-01-27 5:48:38 PM
Past government interventions to encourage risky lending, etc, caused a bubble which inevitably burst. It would be disingenuous for a government to simply say to the public, "this is normal. This is proper. Just go about your business," when it clearly ISN'T normal.
Posted by: anonymous | 2009-01-27 5:48:38 PM
That's an acute observation Anon.
Fact is the Keynsian system itself is just one bubble after another. It does not and never has functioned well or for any real length of time.
In fact Keynes himself had this to say...
"By a continuing process of inflation, governments can confiscate, secretly and
unobserved, an important part of the wealth of their citizens. There is no
subtler, no surer means of overturning the existing basis of society than to
debauch the currency. The process engages all the hidden forces of economic law
on the side of destruction, and does it in a manner which not one man in a
million is able to diagnose."
-- John Maynard Keynes
(1883-1946) British economist
Source: "The Economic Consequences Of The Peace"
I've noticerd that when I post things like this...."Facts", that there is pretty much zero commentary. I attribute this to the notion that people don't want to acknowledge the obvious elephant in the room and who can blame them?
But the fact is, if we let our governments hold us in this insane cycle of bubble and burst...we're actually stupid enough to get what we deserve.
My feeling is that anytime the government gets involved, things will get worse. They need to stop robbing us and back off about a mile, before things are going to improve.
Posted by: JC | 2009-01-27 7:55:39 PM
I've recently mused with friends when the topic of monetary policy comes up over beers (yes, we are that nerdy), that maybe it would be best to have a constitutionally-set interest rate for the Bank of Canada/US Federal Reserve. They would impose a level of certainty on at least one variable in the economy, and deprive the government of the ability to fiddle with the money supply. I'm suspicious of the gold standard since the value of gold, while not under the direct control of the government, is still variable and can be prone to bubbles. With a constitutionally-set interest rate, sometimes it would be 'good' for the economy and other times it would be 'bad', but one could always count on the rate itself staying the same and one would be able to factor that certainty into their business and financial plans. It seems so much of the damage from these "crises" are because events occur differently than people projected (even if maybe they "should" have projected them), too many people cannot adjust to the change quickly enough, an the government reacts by trying to change the rules. With a constitutionally-set government interest rate, we could all count on at least ONE of the rules remaining constant.
Posted by: anonymous | 2009-01-27 9:30:45 PM
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