So now the government wants to usurp the bankruptcy laws and directly seize troubled financial institutions. As Chidem Kurdas points out in Too Big to Fail Red Herring:
Scroll back to September 2008. Lehman Brothers files for bankruptcy, the credit market seizes up and stocks tank. What difference would the proposed law make in that situation? Lehman management is out and shareholders are wiped out anyway. Instead of regular bankruptcy, where the creditors exert influence, government directly takes over.
So the difference is that lenders will no longer be able to enforce their contractual claims. Oh yes, that will be just the right remedy for a fragile credit market. You’ll tell lenders they’re toast! That will really get credit flowing.
The stupid! It burns!
Seriously, it’s just another application of the Universal Solution To Every Problem: have the government take it over.
Hugo Chavez just phoned to say Obama’s being a little aggressive.