Friday, 27 March 2020

There’s no need for government to bail out corporations.


The stock response to any problem from the political left, is for “government to do something”, and the problems for corporations due to the Corona outbreak has elicited the above knee jerk response from Eric Lonergan and Mark Blyth in this IPPR publication, and from Ann Pettifor here.

Titles of the two works are respectively "Beyond Bailouts" and "The Macroeconomic Imperative of Nationalisation."

The first weakness in the above two publications is that none of the authors are aware of the perfectly workable free market response to the current crisis. To argue that a government lead response would be better than the free market’s is one thing, but to be totally unaware of the free market’s response indicates incompetence. So seems I better explain the free market’s response, which is thus.

One solution is for firms in difficulties to simply refuse to pay creditors, and then go along to creditors and politely inform them that creditors can of course push debtors into bankruptcy, but it’s very debatable as to whether that’s creditor’s best option, particularly given that debtor firms will in most cases be good bets in the long run.

Put another way, if creditors do push debtors into bankruptcy, are they really going to get all that many pence in the pound compared to what they’ll get if they allow debtors a period of grace?

And what do you know? Banks are actually adopting the latter common sense approach!

Plus the UK pub chain Weatherspoons has actually adopted the latter “tell creditors to get stuffed” strategy.

Plus the above sentiments of mine seem to be supported by David Andolfatto of the St Louis Fed in a Twitter thread on 25th March.

Moreover, even if creditors do push a corporation into bankruptcy, those corporations do not cease to exist, as seems to be implied by the above three authors. What happens is that, assuming relevant businesses look like being viable in the long term, then someone will make a bid for the business (at a knock-down or bargain basement price of course). Existing shareholders and bond holders are wiped out. Then when things recover, the new owners find themselves in possession of a valuable business for which they paid a bargain basement price.

Hey presto: those with cash to spare (Warren Buffet or whoever) make themselves a few million or billion! Problem solved.

Of course the workload on bankruptcy lawyers and accountants will be horrendous, thus the PACE at which bankruptcy can be organised will be much slower than usual. But the idea that government led rescues would be the solution to that problem is just pie in the sky: governments have enough to do just at the moment. Plus where does government get those who are skilled at valuing the assets of firms in trouble? Those skilled people are already fully employed trying to weigh the pros and cons of bankruptcies!

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