Friday, September 19, 2008

Bankruptcy is Not a Dirty Word

That is the message from, earlier in this week, and I would think the message would not change all that much.

The bailout plan being touted by the Treasury Department and the bloody awful, shambolically stupid ban on short selling, means that govnerment is preventing the natural cycle of business, that is, growth and death, making money and losing money,
Business failure is not only a permissible outcome of capitalism, it’s a necessary one. As the great economist Joseph Schumpeter has written, the process of “creative destruction” is essential for the market to function. For innovation to flourish and the standard of living of the populace to improve, the market must be free to reward success and punish failure.

There is no doubt Lehman’s failure will be difficult for the firm’s employees, investors and others affected by the firms’ dealings. But Wall Street and the U.S. economy has survived similar failures before and come back to prosper. The investment banking firm Michael Milken’s Drexel Burnham Lambert, a powerhouse of the ’80s, went bankrupt in the early ’90s. The ’90s decade still roared, and many of the innovative companies financed by Drexel, such as Turner Broadcasting, still continue to prosper to this day.
Times are going to be tough for the big investors, but honestly, aside from money market mutual funds, most investors are not going to be touched directly by this crisis. Will interest rates go up, will it be more difficult to get consumer loans? Yes, and that really is nothing new. It happens in cycles throughout financial history.

From everything I have read, we as a society are reaping what we have sown by trying to expand homeownership. That is a noble and perhaps valuable goal, but really, it means risks and those risks carry the chance of failure. No one put a gun to the heads of these financier and told them to invest in mortgage backed securities which included risky subprime mortgages. They made that decision and they need to bear the costs of it.

I am not so much of a fool as to believe that in the short term, I am my family will be unaffected by the credit crunch. But I am not willing to sacrifice the financial future of myself and my family in order to cushion the blow of the marketplace on risk taking financiers.

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