Bankruptcy
is Economic Stimulus
Rep. Ron Paul
Texas Straight Talk
Mar 27, 2009
The distraction on Capitol
Hill this week has to do with the jackpot bonuses that executives
at AIG recently received. The argument is over a relative drop
in the bucket. The total amount of bonuses given out was $165
million. The government has put $170 billion into AIG so far.
Many now are demanding we get this money back. We ought to be
spending our time and effort doing something more worthwhile,
like figuring out how the Federal Reserve is handling the trillions
of dollars they are creating and pumping into the economy, and
how that is affecting the purchasing power of dollars in your
pocket.
The big mistake was appropriating
the TARP funds in the first place. A Johnny-come-lately bill
of attainder won't stop the spending epidemic. This whole situation
is a perfect demonstration of why "doing nothing" and
letting failing companies fail would have been much better than
sinking valuable money and resources into them.
When a company makes a profit,
it is a signal that it is taking resources and increasing their
value while controlling costs. When a company operates at a loss,
it is a signal that it is decreasing the value of its resources
or letting out-of-control costs outstrip any value it has created.
A company operating at a loss is therefore an engine of wealth
destruction. Bankruptcies are a net positive for the economy
because more productive competitors are rewarded by opportunities
to buy up remaining assets at bargain prices to strengthen their
operations. In an economy that allows this kind of growth and
change, any jobs lost by bankruptcy are soon replaced by new
ones as the most efficiently managed businesses gain access to
more assets and expand.
Bankruptcy was the stimulus
that we needed in the case of AIG. More bankruptcies would clean
out malinvested resources and enable economic growth again.
AIG, by losing money and maneuvering
their operations to the brink of bankruptcy, was telling us that
they were inefficient. So what did we do? We forced the taxpayer
to assume the losses, and now we are supposed to be shocked that
it is not working out. Had AIG gone bankrupt, it would have been
impossible to hand out these bonuses. The taxpayer would have
been fleeced for $170 billion less last year. Had they gone bankrupt,
the world would not have come to an end, it would just continue
on with one less engine of wealth destruction.
We should have learned from
Japan. The 1990's is referred to as Japan's "lost decade"
because of the zombie banks kept on life support by the Japanese
government. Any productivity was redirected through these engines
of wealth destruction, resulting in long term stagnation. We
should and can avoid this outcome if we come to our senses.
A recession should be a time
of strengthening and regrouping for an economy. But as long as
the government insists on maintaining the status quo by propping
up failed institutions, we will continue to dig a bigger hole
for ourselves.
Mar 23, 2009
Rep. Ron Paul
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website.
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