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Source link: http://archive.mises.org/8495/what-firms-are-allowed-to-fail/

What firms are allowed to fail?

September 10, 2008 by

Failure is not an option, right?

Then why is Lehman Brothers being allowed to fall apart? Why hasn’t the Fed stepped in to prevent another Bear Stearns? What separates a failable company from a non-failable one?

In 2004, Robert Kuhn produced a show called “In Search of China.” It chronicled the life and times of Chinese residents that were adapting to new market conditions.

In one of the vignettes, the camera crew interviews the employees of a sugar factory that recently went bankrupt.

It was the first business allowed to ever go bankrupt in the past 50 years, vanishing into nothingness. This concept was foreign to many of the workers as the state had always bailed out or subsidized failing companies in the past. In fact, unemployment was also a foreign concept and prompted several to question whether they should commit suicide.

Thus, the recent comparison by Jim Rogers (video) – the US is more communist than China – is not only germane, but increasingly accurate.

See also: The Peaceful Rise of China
Liquidate! Liquidate!
How to Avoid Another Depression

{ 5 comments }

Mike D. September 10, 2008 at 1:22 pm

I just found out what GSE stands for Government-Sponsored-Enron.Same accounting fraud. However, executives get to keep their ill-gotten gains – no prison. Oh, and there is no outrage.

Curio September 10, 2008 at 3:17 pm

General Motors (GM) is another corp that has been rumored to be “too big to fail”.

The company has a dysfunctional operations model, has for years, and is effectively bankrupt. Not to mention riddled with SPE’s (see Enron for a discussion on SPE’s) and other “off-Balance Sheet” items. One look at their financials is enough to make anyone head for the hills.

Yet there is an expectation that, like Chrysler in the ’80s, GM will be bailed out by the Feds if necessary. Pathetic.

Texas Conservative September 10, 2008 at 3:31 pm

Bear Stearns caught the Fed off guard, and since March it has put into effect many inflationary safeguards to allow insolvent institutions like LEH to remain in operation. Emergency loan facilities, securities lending, etc. My guess is that LEH has already been told that it has until close of business Friday to make a deal with Korea, else face seizure by the Feds.

Bruce Koerber September 10, 2008 at 9:40 pm

What firms are allowed to fail?

The ones that would exist if there was not intervention destroying capital? This is an opportunity cost associated with ego-driven interventionism.

nicholas gray September 11, 2008 at 8:14 pm

Another neologism- Fafist, not fascist! For anyone who supports Fannie And Freddie (Faf!)

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