I’m as tired as anyone of the economy suffering one hit after another. The parade of bad news has turned into a constant drumbeat, and there is no end in sight to the fall of the economy.
At the same time, I’m getting really tired of hearing bailout news for every big company that gets into trouble. If Lehman Brothers made some risky investments, then I say let them bear the consequences of that risk and go under. That’s what economists call the moral hazard effect – if the consequences of bad investments are somehow made to go away, then the markets don’t have the opportunity to learn from bad experiences.
We’ve grown used to an economy in which the status quo holds more value than innovation or clear thinking, and it’s time for us to dispose of that. There was a time when mortgages were made on the basis of trust and careful evaluation of risk. As soon as we got away from fundamentals of risk management, we started to see companies failing as they struggled to achieve the unachievable. If we continue to bail out companies without regard to their competitors who made more prudent choices, then we eliminate the checks and balances that markets naturally impose. I say let em go under.