Rolfe Winkler

I notice this morning that NYT’s Weekend Opinionator quoted me in an article about GM emerging from bankruptcy.  While I appreciate the link, the way they characterized my quote was off the mark.  I didn’t say GM’s road from here “should be a piece of cake.”  I said early reports of the economy’s demise, should GM file, were premature.

My point was less about GM and more about the lessons its bankruptcy provides for other busted debtors relying on government support.  The primary argument defending bailout packages for banks and homeowners is we can’t let them go bust, it would be too harmful to the overall economy.  No doubt it would be harmful.  But what did we learn from GM?  Primarily this:  Writing blank checks to failed debtors is tantamount to flushing money down the toilet.  That’s far more harmful to the economy.  We build up more unpayable debt while accomplishing nothing.  Better to spend the money restructuring those debts so that the business can be properly recapitalized.

This is what needs to happen with ALL of the country’s largest banks.  Their busted assets need to be written down and their shareholders and (some) creditors need to be wiped out.  Do that, and the financial system will emerge leaner and healthy. This will certainly involve government support, primarily via FDIC as it absorbs losses of received assets.

But that’s better than straight bailouts, which only keep dead banks walking.  More money doesn’t make them any less dead…not until their balance sheets are fixed.