Is it time for the ultimate bailout?

With the US financial sector effectively insolvent, the retail sector in tatters, the insurance industry in disarray, the manufacturing industry moribund, the transportation industry going nowhere, and the American consumer in full-scale retreat, with no end in sight to government deficits if we continue to try to prop it up, perhaps it is time for the ultimate bailout:



Let's bail out everyone.



What would this heresy mean? Essentially cancelling all debts currently owed by everyone and starting over. It almost is coming to that, isn't it? The writing down of debt by bankruptcy judges essentially does this to give companies and individuals a "clean start" so why not try it for the entire country? At first, this sounds like a wonderful elixir: no more debt. Even better, let's let people keep the cars and the homes that they have. Of course, all bondholders would be wiped out and that means that the pensions for most Americans would be effectively gone but isn't that happening anyway?



It sounds ridiculous doesn't it? Unfortunately, this is essentially the strategy that we are currently pursuing for the American financial sector. The US government is so concerned with eliminating systemic risk in the US financial sector that it is essentially ensuring that hundreds of banks that have failed are bailed out and allowed to continue. Even though they owe billions or even trillions in obligations (in the aggregate), these highly leveraged companies are not only allowed to continue to operate and lend, they are encouraged to do so.



We no longer punish failure. This means that we no longer reward success.