In case you’re new to the planet, many things in this life happen in cycles. Whether it’s the seasons, the stock market, or governments, there are times where things grow and time where things contract, and it’s for the good of all things.
A recession or contraction is actually beneficial for an economy, because it’s a time where companies are tested—a time where dross is wiped away, where excess is eliminated, and new business is allowed to start and flourish.
We are in the midst of one of these times, and while not free from pain, it is a time to expose what is good and bad, and a time to eliminate the bad.
The Government Reaction to Nature
No, I’m not talking climate change. Back last fall when it was first found out that a recession was coming and that many banks—forced to value their assets based on what they could get for their loans rather than on what they could get in the future1—informed the public that they were in trouble, the government decided that some companies—the bigger companies—were too big to fail. Whether it was AIG, GM, or any other short acronym that had been around for a while, “We the People” had to bail them out because otherwise it’d be the end of America.
The problem with this logic is that it misses the entire point of the correction/recession and is blatantly false.
GM has long been plagued with a series of bad fundamental decisions that have made the giant a problem rather than serious competition with the Japanese auto makers. They have no way of renegotiating promises to retirees of the company who get generous pension plans. They are losing money on every car since they cannot cut the costs of their vehicles when their competition—being new—can come in with a better product at a cheaper price.
It’s time to open up the area to competition. It’s time to let these companies fail and encourage new ones to come up in their place.
Republicans Taking a Stand
And fortunately for us, there is a party that’s beginning to get behind this plan:
John McCain and Richard Shelby, two high-profile Republican senators, said Sunday that the government should allow a number of the biggest U.S. banks to fail.
“Close them down, get them out of business,” Shelby, the senior Republican on the Senate Banking Committee, said on the ABC television program “This Week With George Stephanopoulos.” “If they’re dead, they ought to be buried.”
Republican lawmakers said Congress should stop providing General Motors Corp. with federal aid and let the company file for bankruptcy if necessary.
“The best thing that could probably happen to General Motors, in my view, is they go into Chapter 11,” Senator John McCain said on the “Fox News Sunday” program today.
The automaker could reorganize and renegotiate its labor contracts to come out “stronger, better, leaner,” McCain, from Arizona, said.
So, what do you think? Too big to fail, or is failure the best option?
- Otherwise known as Mark to Market.