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2010-12-19

Should we let banks and companies go bankrupt?

Peter Schiff argues in favor of this idea on the Daily Show. His credentials include that he predicted the current economic problems long before they happened (and was even laughed at by some pundits, check out the clips in the video). Summary:
  • Saving banks and companies that would fail on their own causes inflation. That is, this short-term fix leads to much more severe long-term problems. It also prevents new innovative companies from succeeding and hiring new people.
  • The economy would benefit from a credit crunch resulting from bankruptcies, as the focus would shift from consumption to saving and production. In the long run, consumption can only be maintained if this shift happens. Currently, much of the US money that is being spent is already owned by foreign countries.
  • Stimuli and low interest rates enacted by the government are bad for the economy. They encourage reckless consumption, reckless borrowing, and speculation. Without government involvement, interest rates would be higher which encourages saving and production.
  • Quote: “If Barack Obama says ‘[Consumer!] credit is the lifeblood of the economy,’ [...]  he’s wrong. It is the cancer of the economy.”
  • Economic policy has not changed much under Barack Obama.
The main problem that I see is that in our current system, while the restructuring of the economy would be good for the collective, it can be disastrous individually. If we can ever permanently avoid the latter, we'll be able to let the economy go through its natural cycles (just like any complex system). Instead, we are currently stimulating it when it is just about to recover from over-stimulation.

Related reading: How Germany got it right on the economy. Quote:
It's quite a turnabout for an economy that American and British bankers and economists derided for years as the sick man of Europe. German banks, they insisted, were too cautious and locally focused, while the German economy needed to slim down its manufacturing sector and beef up finance. Wisely, the Germans declined the advice.
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