Let Them Fail!

Many people have trouble grasping the libertarian principle that businesses–even huge businesses employing thousands–should be allowed to fail if they make bad decisions.

One can address this issue intellectually, but sometimes it’s best to show the real obscenity of having the government step in to “bail out” failing industries. For a whiff of the putrid stench of “government/business cooperation” (a concept regularly touted by both Reps and Dems) take a quick look here: http://www.chicagotribune.com/news/opinion/chi-1009edit2oct09,0,4386282.story .

AIG, the huge insurance firm, has failed in the marketplace, largely due to bad decisions in the sub-prime home loan debacle. Now, after using their political pull to sink their claws into the taxpayers’ collective hide, they have the sheer indecency and tackiness to throw a huge party, complete with stays in the Presidential Suite at $1,600 per night!

You would think these vampires would at least hold off on the partying and show a little bit of humility on accepting taxpayer bailouts. But no! They are “entitled!”

They are “too big to be allowed to fail!”

If this doesn’t make you want to puke, it’s hard to imagine what would.

It is true that, if we let inefficient, poorly run companies fail, then thousands of people will be (temporarily) thrown out of work. The assets of the company, however, do not simply vanish into thin air; rather, they go down in price, going from overpriced white elephants, to potential bargains.

Let’s say, for example, that a huge automobile company (let’s call it GM, just for fun), shows huge losses, and cannot meet its financial obligations. That is, it is bankrupt. The assembly lines; the forges; the metalworking plants; the suppliers of plastics and rubber, do not go out of existence. They go down in price. Temporarily, the plants have to be shut down, and workers are given their pink slips.

Now, all those assets are bargain-basement priced. A company with a better history of planning, management, inventory control–you name it–can ride into town and buy those assets for pennies on the dollar. They can then institute their own, better business practices, reopen the plants, and start hiring people back. Let’s call that company, just hypothetically, Toyota.

The new management at the old (but now reopened) plants, doesn’t typically waste time throwing huge, obscene parties where they blow $1,600 on presidential suites. Rather, they knuckle down, roll up their sleeves, and start to turn things around.

The best thing you can do, when facing a financial bubble created by loose government credit policies, is to do nothing. This is very counter-intuitive to most people, whose natural reaction is for the government to “do something” to solve the crisis that the government itself has created. But the best thing to do is to let those companies fail, let prices collapse, and let better, leaner management teams buy up the assets of the old dinosaurs, and get things running efficiently again.

The very WORST thing you can do is to reward the failed management of the old company by flinging unearned taxpayer cash at them. This is not only impractical, but as demonstrated by AIT, can be absolutely obscene in moral terms.

Is there anything the government can “do” to solve the crisis? Well, yes there is. The government can abolish the obscene Federal Reserve, which started the whole crisis through loose monetary policy that has destroyed the value of the dollar. The government can move towards sound money policies based on gold and silver coin. The government can outlaw the fraudulent practice of Fractional Reserve Banking. Beyond that, the government needs to step aside and let efficient, innovative companies succeed, and poorly run companies fail.