Bankruptcy as a way of sticking it to the man

More neo-con dogma. Joseph Stiglitz, 2001 Nobel laureate in economics, noted critic of “free market fundamentalism” and author of Whither Socialism, Globalization and Its Discontents, and other works, gets all ideological about the auto bailout:

Financial markets are supposed to allocate capital and monitor that it is used to good effect. They are supposed to be rewarded when they do that job well, but bear the consequences when they fail. The markets failed. Wall Street’s focus on quarterly returns encouraged the short-sighted behaviour that contributed to their own demise and that of America’s manufacturing, including the automotive industry. Today, they are asking to escape accountability. We should not allow it.

That’s neat — a market-skeptical argument for “letting the market work.” But it rather sloppily conflates “market failure” with the failure of particular players within the market. The argument for markets is not that everyone always gets things right, but that those who get things wrong are punished. Yet those who invested in the auto industry were sheltered from the consequences of their failure by decades of mini-bailouts: subsidies, voluntary export restraints, innovation funds, location incentives and the like. That looks more like government failure than market failure. Markets accurately priced in government support for the industry, just as management and labour did what government, in effect, told them to do about the industry’s problems: nothing. Whereas an unsubsidized, unprotected auto industry would have been forced to clean up its act long ago.

To be sure, Stiglitz is open, given the current state of financial markets, to some form of government backstop for the auto companies — after they have entered bankruptcy, ie erased shareholders’ equity. But

the “bridge loan to nowhere” – the down payment on what could be a sinkhole of enormous proportions – is another example of the short-sighted behaviour that got us into this mess.

Stiglitz is famous for his writings on how markets work — or don’t work — in the presence of asymmetric information, ie where buyers know much less than sellers about a product, a field he pioneered along with fellow laureate George Akerlof, whose seminal “The Market for Lemons” is much cited these days with regard to the crisis in financial markets. Basically, the problem is that no one knows whether the financial instruments they’re being offered today are “lemons,” so nobody’s buying, or not without a substantial discount.

But in Detroit’s case everyone knew they were selling lemons. Somehow that became an argument for showering them with state favours, again and again and again. You don’t suppose history could be about to repeat itself. do you?

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