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Celebrate Bankruptcy
For the last 3,800 years frequent and unrestricted application of bankruptcy has been a proven method to renew and stimulate economic growth. Easy bankruptcy is one of the least appreciated, least acknowledged keys to the success of Western Civilization. Easy bankruptcy is the thumb in Adam Smith’s invisible hand. Our former and current political and economic leaders shun and restrict easy bankruptcy. They wrongly focus on responsibility. Easy bankruptcy is not about responsibility; it is about forgiveness, mercy, humility, fresh starts, new starts, and transparency.
Easy bankruptcy admits we made mistakes, that we wrongly predicted the future, that things change beyond our control; that the old must be torn down to make room for the new. Easy bankruptcy is a wonderful self-regulator.
Easy bankruptcy allows the wisdom of the crowds, inherent in the markets, to choose who fails and who survives. This is in contrast to today’s reliance on the thumbs up and thumbs down of a few bureaucrats. Liberal bankruptcy would have prevented the bureaucratic mystery and capriciousness of why Bear Stearns was saved and Lehman Brothers was allowed to fail.
Easy bankruptcy prevents zombie banks, zombie insurance companies, and zombie auto companies from staggering forward for the next decade soaking up taxpayer and printing press provided credit. Liberal bankruptcy allows finite credit to be allocated to new entrepreneurs and existing medium sized businesses that grow and replace the large companies that fail. Easy bankruptcy votes against the entrenched status quo from a bygone era.
A cautioning note on easy bankruptcy and individuals; easy bankruptcy applies to forgiveness of past financial debts. Easy bankruptcy does not apply to current marriage and family obligations or future obligations. Easy bankruptcy does not spill over to advocating easy divorce. Easy bankruptcy should not apply to child support and/or alimony payments.
But that said, easy bankruptcy is a wonderful self-regulator. The backdrop of easy bankruptcy causes lenders to become prudent and disciplined about how much and to whom they lend. Credit card issuers zero in on quality accounts instead of quantity. Mortgage lenders return to the days of 20% down payments. Easy bankruptcy begins to naturally “right size” the financial services sector with the other parts of our economy. Easy bankruptcy trusts the invisible hand of the markets to guide and direct instead of the arbitrary decisions of a few regulators.
Easy bankruptcy creates transparency. Easy bankruptcy breaks open the guarded walls of corporations so that the secrets of valuation and worth can be exposed for competitive bidding. Liberal bankruptcy brings things out of closed government conference rooms and into the open. Treasury Department officials cease guessing at and overpaying for toxic assets. Shotgun marriages like the one that pushed Merrill Lynch into the arms of Bank of America, or Bear Stearns into the arms of JP Morgan Chase are no longer necessary. Easy bankruptcy would have prevented the fight between Wells Fargo and Citibank over who gets Wachovia. Government officials are averted from arbitrarily declaring Bear Stearns is worth $2 per share, and then having to change their guess a week later. A bankruptcy judge would have been able to annul the bonus clauses in AIG employment contracts. Easy bankruptcy allows time for due diligence, and time for competitive bidding to value toxic assets.
Celebrating bankruptcy does not mean being callous to others’ pain, but bankruptcy should not be shunned because of pain. Think of your life celebrations that have involved pain. The birth of your child after hours of agonizing labor. Your excitement at the triumph of gold medalist Michael Phelps while dozens of competitors agonize in defeat. We celebrated at the conclusion of World War II even though many ached from the loss of loved ones and many others were permanently disabled from battle wounds. We celebrate bankruptcy because it brings resolution and new growth faster than government stimulus plans which spread economic misery for longer periods of time. We celebrate bankruptcy because it cleans up financial messes faster than alternative government programs. We celebrate bankruptcy because it is as American as baseball; you get three strikes not one, and after striking out you get another 3 or 4 tries at the plate!
The best thing that President Obama, Ben Bernanke, and Timothy Geithner could do this year would be to declare that 2009 is a year of easy bankruptcy for American corporations, and a year of easy bankruptcy for American consumers.
Mr. Boyles is a Senior Portfolio Manager with Retirement Specialists Incorporated in Houston, Texas. Email: Lawrence@max401k.com
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