Bankruptcy Is Economic Stimulus

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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.

See
the Ron Paul File

March
25, 2009

Dr. Ron
Paul is a Republican member of Congress from Texas.

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Paul Archives

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