I should add that FrumForum has reposted an excellent Arpit Gupta post on how the pro-growth right might respond to the downturn. Many of Arpit’s ideas will give congressional Republicans heartburn, particularly his advocacy of wage subsidies, an idea I’ve backed enthusiastically since reading Edmund Phelps’s Rewarding Work shortly after it was published in the late 1990s. Arpit sees wage subsidies as an effective way to keep workers attached to the labor force, a pressing problem in a world where male labor force participation has declined by 5 points over the last thirty years, a number that could very well increase as skill-biased technical change continues.

Another controversial Arpit idea — and potentially the most important one — is his call for “speed bankruptices“:

This proposal manages to do everything we want bankruptcy to do, while tailoring the response for financial institutions. In bankruptcy, we recognize that firms have failed, and kick out old management. Lenders take haircuts in order of seniority, but do better in bankruptcy than in liquidation. Meanwhile, these firms—now recapitalized, and without toxic assets—are free to raise further capital and lend.
When opting for a hybrid bankruptcy route, however, it’s also essential to reform the bankruptcy code to end derivative counterparties’ exemption from the automatic stay preventing collateral seizure in bankruptcy. As both Chris Papagianis at e21 and Mike Konczal have noted, this exemption reduces the incentive for the suppliers of short-term capital to shadow banks to monitor their risk-taking.

I worry that we’re underestimating the dangers associated with the extraordinary economic weight of zombie financial institutions. Speed bankruptcy is a way out of the trap. Unpleasant though Arpit’s prescriptions may be, the question is whether it’s better than the alternative.