Wednesday, May 6, 2009

Auto Bailouts and Bankruptcies

Today's post (really, late last night's post) on Judge Posner's Failure of Capitalism blog discusses the auto bailouts, the second stimulus package (which was passed after he finished the book), and bank stress tests.

In the book, Judge Posner argued that the auto bailouts were necessary simply to keep the major auto companies from collapsing when uncertainty about the course of the depression was highest. Their utility lay in delaying bankruptcy, not in making the companies viable again.

Today, some five months later, Judge Posner observes that the bailouts "worked." They kept the companies from failing at the height of public fear, when there was the greatest risk of a deflationary spiral. But by the end of March, the generalized, public fear had largely subsided. Thus, the bankruptcy of Chrysler and likely bankruptcy of GM do not raise the same concerns they did in December.

Although Judge Posner does not say this, it would therefore appear that there is now no emergency that could justify the administration's efforts to strong-arm Chrylser's bondholders.

Hat tips to Volokh Conspirator David Bernstein and to Instapundit.

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