Survival of the Weakest

Steve Waldman at Interfluidity makes a very good point on how we are spending trillions of dollars to make life worse for the good companies. Yes, we are literally throwing money at institutions like AIG and Citibank allowing them to keep competing with other companies that perhaps acted more prudently. We are providing good companies with a built in disadvantage, an uneven playing field.

http://interfluidity.powerblogs.com/posts/1235945541.shtml

There is a solid argument to be made that government support led to the subprime mess in the first place. Freddie Mac and Fannie Mae had the implicit government support that gave them a distinct advantage over the competition. To address this, other financial institutions got creative with subprime mortgages and securitization. They made a lot of money doing what Fannie Mae's lending standards would not allow it to do. And these financial institutions are now finding out why relaxing credit standards to pretty much nothing is not a good business model. Government support to some is a disadvantage to others.

What the current plans fail to realize is that in this new economy we simply will not need as many financial institutions. A good bit of what they were doing with toxic derivatives is business that is simply not returning and the business that remains is that boring old banking stuff. What should be happening is liquidation. Yes, let the FDIC do its job even with the big boys. The sooner these institutions are allowed to close their doors, the sooner their competitors will get some relief by getting the remaining business.

But these institutions are too big to fail, right? Perhaps they are too big to save.

http://www.nakedcapitalism.com/2009/03/jim-baker-first-lets-kill-all-zombies.html

Disclosures: None