Wednesday, February 25, 2009

On Bailing Out Industries

I got sick of how many times I heard that we HAVE TO bailout the banking industry, or the auto industry. Why not let the free market bailout those companies that are worthy of surviving, and let the other ones fail inside the industry.

Anybody remember the previous recession, in 2000-2001? The same way as this recession is driven by banks, that recession was driven by the tech industry. A lot of my friends remember that. Giants like Microsoft or AT&T were laying off tens of thousand of people. Companies were closing every day. Thousands of emerging businesses crashed. People's 401k's were worth nothing. Nasdaq lost more than 60% of its values and shares that were trading at $100+ were suddenly worth pennies. It was said that it's the end of the tech boom. That all the Internet innovation imploded and it will take a long time to resume the advancement. Fiber networks had been a waste and a failure.

What did the Government do to help specifically the tech industry? Nothing!! What did the banks do? They canceled financing, closed credit lines, stopped investment and let even more thousands of companies go out of business. So don't tell me know that it's my duty to save the banks and the car industry. The car people and the bank people didn't give us a dime (on the contrary) 8 years ago, so I don't see why I owe them ANYTHING.

So what happened in the aftermath of the last recession? Companies that took too many risks during the bubble went bankrupt. Efficient companies came back even stronger. They merged and consolidated and created new giants which are practically unaffected by the current crisis. Did the failure of some (famous) companies mean the end of the world? No way.

This is exactly what we should do now. Let bad banks fail, and smart ones will survive. There will be no end to credit, because banks don't make money, and they don't lend their own money. They taken someone's money and lend it to someone else. If some banks can't do this profitably, others will do. Some will fail, the rest will consolidate and continue stronger.

And I don't want to give banks or car companies any more than they gave my industry in 2001.

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