Why All the Bailouts Will Fail
Rich Vigilante and Andy Redleaf in Monday’s NY Post:
The [Bush] administration’s belief that saving GM from the bankruptcy it so richly deserves is essential to saving the rest of the economy symbolizes how it misunderstood the crisis from the start.
When credit markets seized in mid-September, the government acted as if the problem were the collapsing market price of non-performing loans held by money-center banks. Nonsense. The real problem was the collapsing market price of performing loans held by everyone else.
That is, the true crisis was not that companies that richly deserved to go under couldn’t raise cash at favorable rates, but that otherwise good companies were (and still are) imperiled because they can’t raise money at reasonable rates. The problem today is not that a sensible market doesn’t want GM bonds, but that a panicked market doesn’t want anyone’s bonds.
Before we can make the financial crisis better, we first have to define correctly what the problem is. Essential reading towards that step.