Tuesday, September 16, 2008

Lehman Brothers and a Healthy Economy

The banking crisis continues as Lehman Brothers files for bankruptcy. Most people seem to view banks failing as a sign that the financial crisis is deepening. You won’t be too surprised to learn that I see this differently.

The damage to the economy was done when financial institutions made poor choices chasing short-term profits at the expense of the long-term health of their businesses. Lending money to people who can’t pay it back has to cause problems eventually. That banks are failing now is a logical consequence of their actions rather than a sign that things are getting even worse.

To maintain a healthy economy, some businesses must fail. Everything would become stagnant if we were to prop up unprofitable businesses. Well-run businesses should see their market share increase as their poorly-run competitors fail.

This doesn’t mean that government intervention is always wrong. However, the important test of whether government should step in is whether it is in the public interest to do so. Having the government prop up a business just for the sake of that business is a mistake.

So, when you hear about a company failing, don’t automatically take it as a sign that the sky is falling and we’re doomed to a dark future. The remaining companies in the same industry are likely to be better run and more likely to succeed at offering products or services that make our lives better.

1 comment:

  1. Michael: Very good point. Market economy is all bout fair competition. Government role should be minimum. The brokerage and underwriting business will adjust to remaining players and will be more efficient for sometime.