Commentary: Bankruptcy, not bailout, is the right answer - CNN.com
This is why I'm still on the fence about the bailout. I'm not an economist, and I keep hearing reassurances from both sides that their way is the right way. Can someone explain the flaws in this article? In other words, why will the world end if the bailout isn't passed?
So much misinformation, so little time.
First the premise that this was caused, and can be fixed, by dealing with Fannie & Freddie and the Community Reinvestment Act is hogwash. Fannie & Freddie didn't originate subprime loans. In fact, the vast majority of their portfolio was "conforming loans" (non-jumbo, full documentation, standard 20% down payment, etc. etc.). They were allowed to grow too big because of their "implicit guarantee", but that is an entirely different matter.
Also the idea that lenders ran headlong and recklessly into subprime and securitization because the Government told them to is flat out silly. They went overboard because boatloads of money was to be made (or so they thought) and would have done so even if the Feds never uttered a peep.
As to bankruptcy. I think its a good and necessary option in most cases. The problem is, we've let too many institutions become "too big" (or more accurately "too interconnected") to fail. The government tried to let Lehman go and the result was potential cascading failures (AIG the biggest among them).
The problem was/is, "bad" financial institutions were/are threatening "good" financial institutions. Both Goldman Sachs and Morgan Stanley have been profitable throughout this whole mess but I'm convinced they would have filed for bankruptcy last week had the government not floated the "bailout" idea. How many other institution, both "good" and "bad" would Goldman and Morgan have taken down?
We can either try to adress this situation one institution at a time as they fail, which is what we have been doing (Fannie & Freddie ($200B), Bear Stearns ($32B), AIG ($85B), Wachovia ($??), Countrywide, WaMu, Lehman, . . .). Or we can try to address the problem in a systematic way, which is what the "bailout" hopes to do. The "bailout" is not the only way to tackle this problem systematically. But simply saying "let them file for bankruptcy" is a recipe for a complete collapse of our financial system, and, our economy and standard of living with it.