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Talking Sense

Sometimes the public at large, as inexpert as it may be on the intricacies of economic policy and unschooled as it is in the fine points of what has passed for sophisticated financial practices, get to fundmental truths before the Beltway and academic elites. The public has had it with bailouts — for banks, AIG, and car companies. They sense we are wasting billions, enriching the undeserving, sparing the mendacious and ultimately postponing and worsening the inevitable reckoning. And unlike Congress they understand that the bill will be coming to them, their kids and their grandkids. Not many inside the Beltway grasp this — or will admit it if they do.

Then along comes someone talking sense:

“If companies fail, you need to let them fail,” former SEC Chairman Richard Breeden told the Senate Banking Committee Thursday. Mr. Breeden went on to trash almost every premise behind Treasury Secretary Timothy Geithner’s year of bailouts. “We seem to have policy makers who either don’t understand it or are afraid to use it,” he said of Chapter 11 of the bankruptcy code.

Turning to Mr. Geithner’s latest idea of an overall regulator of systemic risk, Mr. Breeden said: “It won’t work to try to assign planning for every potential risk in the economy to a single agency unless we want a centrally planned economy like the old Soviet Union. . . . It is particularly hard for me to see a case that any single group of regulators did such a good job [in anticipating the current crisis] that they deserve becoming the Über Regulator of the country.”

[.   .    .]

“The rule of law is a very valuable thing,” said Mr. Breeden, especially when compared to the ad hoc rescues of the past year. Mr. Breeden added that the Federal Reserve “should be a central bank, not the world’s largest hedge fund.”

Mr. Breeden proposed a simple reform in which courts would be given the resources to quickly process an AIG-sized bankruptcy. He recommended “a special ‘systemic bankruptcy’ court composed of federal District or Circuit Court judges with prior experience in large bankruptcy or receivership cases,” much as the Foreign Intelligence Surveillance Court specializes in weighing warrant requests related to foreign spying in the U.S.

Gosh, that does make a whole lot of sense. We stop politicians and appointees from running businesses for which they have no expertise.  (No longer do we have a committee of a dozen people, who are only getting up to speed on the operation of the car industry, deciding the fate of billions in taxpayer subsidies.) We allow shareholders and management to bear the lionshare of the financial burden — not the taxpayers. And whatever taxpayer resources we have been spending by the boatload on ineffective bailouts can go toward retraining employees or providing incentives for viable firms to expand and hire.

You would think after the AIG bonus debacle the politicians would have learned some humility. But no, they’re still bent on micromanaging the economy. If you thought markets were imperfect, wait until the politicians and their hired hands run the show. There is another choice — one which the country at large seems to be embracing. We’ll have to see if any of the Washington crowd follows.


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