Bankruptcy versus Bailouts

Henry Thompson


The market approach to a failed firm is bankruptcy. A firm that cannot sell enough of its product to pay its bills should disappear. If a bank makes too many bad loans, it should go bankrupt. Bankruptcy is a normal part of economic life with laws that guarantee debtors and then stockholders are paid as much as possible. More efficient firms then take over. Two government subsidized mortgage banks, Fannie Mae and Freddie Mac, led to the recent financial crisis and the government bailout. The underlying goal of government bailouts is to keep a few large firms in business at taxpayer expense.