Realist, not conformist analysis of the latest financial, business and political news

Let ‘Em All Go Bust

What if we’re treating this coronavirus the wrong way?

Sure, we’ve an economic crisis as a result of the coronavirus. Or, perhaps, an economic crisis as a result of the gross over reaction to said Covid-19 dangers. It’s time which will tell us whether that is actually true. If the Swedes, who are doing nothing much in the way of economic closedown, end up with less bad health care results, or even the same, then the actions of many governments will have been that over reaction.

At which point we’re going to have the most interesting conversations about their competence to close down parts of the economy over climate change and all the rest, aren’t we?

But, given where we are now, what do we do about all those businesses going bust?

The important underlying point here is that bankruptcy doesn’t destroy economically productive assets — it just removes them from the legal wrapper and management where they’re not well used.

A bankruptcy, whether Chapter 7 or 11, doesn’t destroy land, or labor, knowledge, nor machinery. A Chapter 7 liquidation simply says this is just never going to work and sends those assets off to be used by someone else where they might be put to better use. Chapter 11 starts from the same place, it isn’t working, but it might if there’s more capital, less borrowing, different management, and so on.

The bankruptcy process is the one we should be using, as we have been for a couple of centuries now.

There is a moral point to consider, too. Either bankruptcy process wipes out the capitalists in those organizations and makes heavy demands upon those who lent to them as well, which is, in the grander scheme of things, just fine. For they get all the benefits in the good times, so the pain is theirs to endure during the bad times. The destruction of their shareholdings is not the same thing as laying waste to the productive capacity of the nation. It’s just moving that ownership around a bit.

It is possible, of course, to think of another way of doing this. We could have subsidies, bailouts, and political favors. But who gets what in such a system will depend upon the position in the political alimentary canal of the supplicant. This is not a known manner of reaching useful outcomes.

Just let them all go bust. We’ve already got a good system for picking the useful bits out of the resultant mess — let’s simply make use of the bankruptcy courts.

That is, we’ve already got a system to do this. Therefore we should use the system we’ve got to do this.

Only those deluded enough to think that government is going to be better at the sorting process would disagree.

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David Morris
David Morris
4 years ago


That’s a little Andrew Mellon(ish), who in the early 1930s advised Hoover to to refrain from using the government to intervene in the depression “liquidate labour, liquidate stocks, liquidate the farmers, liquidate real estate. Purge the rottenness out of the system. High costs of living and high living will come down. … enterprising people will pick up the wrecks from less competent people.”

4 years ago

Cheryl Chumley in the Washington Times’ “Rapid Reaction” column makes the same point that bankruptcy is the best way to sort out workable from non-workable organizations going forward, no matter whose fault it was. Stephen Moore writes today that, for the cost of the US “stimulus” package, we could instead have repealed the personal income tax. We know the latter would encourage people to do new things, such as be productive while practicing “social distancing.” We don’t know what sending EVERYONE a $1200 check will do. Not feel that times are back to normal!

Chester Draws
Chester Draws
4 years ago

Bankruptcy doesn’t help those that fold while profitable though, due to cash flow issues from not being able to work for a month or two.

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