"If everybody wants a bailout, that's a good indication that we're making some mistakes."

From James Hamilton on Econbrowser:

"Bailouts should be no fun( I SAID THIS ON SEPT. 22, 2007 )

If everybody wants a bailout, that's a good indication that we're making some mistakes.( TRUE )

Let's start with first principles-- why are we talking about huge potential transfers from the government to private companies in the first place? My starting point would be the observation that U.S. output is falling significantly below what America is capable of producing. The problem is not that labor and capital are physically incapable of producing more, but instead that certain key institutions have existing legal commitments that they are unable to fulfill. Foremost among these would be in the financial sector, where liabilities threaten to exceed the market value of assets, preventing the entire sector from functioning properly( TRUE ). But also prominent are other crucial industries, such as the domestic auto manufacturers with a very significant burden of debt and obligations to current and retired workers. We need an unambiguous resolution of this problem, allowing these institutions to return to productivity. The sooner those unpayable commitments can be resolved, the better off we're going to be.( TRUE )

How do you solve the problem of unpayable existing obligations of institutions that otherwise have the resources to make a productive contribution to total economic surplus? That of course is the function that our bankruptcy system is intended to provide. In a typical bankruptcy, the company's owners and senior management get wiped out, some crumbs are left for creditors and workers, and hopefully the most valuable underlying assets get reallocated to alternative productive use. But bankruptcy is a very clunky process with lots of deadweight costs in and of itself. We should have significant concerns in the present environment about the possibility of such costs leading to spillover effects, forcing other institutions into bankruptcy that otherwise might have remained solvent. There is a good case to be made for bringing the taxpayers in as a fifth player at the negotiating table along with owners, creditors, management, and workers. There are likely going to be instances in which a modest taxpayer contribution, in conjunction with substantial concessions from the other four parties, could end up preventing a much larger economic loss. I could easily believe that a judicious expenditure would leave the taxpayers as a group significantly better off than if we'd simply allowed the bankruptcy process to run its course.

The representative of the taxpayers in such negotiations would seem to have by far the strongest hand at the table. The threat point is to let the company go into bankruptcy, and the limit on what the taxpayers are willing to contribute should be the direct benefit to taxpayers (as opposed to benefits to the other four parties). If your company doesn't like our terms, fine, go your own way, and we'll prop up the next domino in line instead. If properly implemented, the taxpayers should leave the negotiating table pleased with the deal they achieved, and everybody else should leave battered, comforted only by the knowledge that, had they not made those concessions, things would have been even worse.

On the other hand, if everybody and their grandmother is lining up for a bailout, and pulling political strings ([1], [2]) to make sure they get it, I read that as prima facie evidence that the taxpayers' interests are not being properly represented."( I AGREE HERE )

I'm not sure that we allow banks to go bankrupt. Wouldn't that add a bank run to our problems?