Joseph Stiglitz is against the Detroit bailout . . .

. . . because he thinks it will bail out the wrong people and send the wrong message to markets

Mr. Stiglitz is a Nobel-prize winning economist. He is also a staunch liberal whose must-read books and articles on globalization are critical of the way the world economy creates winners and ignores the losers. Stiglitz position on the bailout means that an interesting alliance is brewing between Republicans in Congress -- who hate the idea of bailing out unionized firms in the Democratic north -- and liberal, even radical economists (like Mr. Stiglitz) who see the Detroit bailout as a fraud.

No wonder the bill died in the Senate last night.

For my part, I fear what will happen to equity markets as a result of the bailout bill dying. Or rather, I fear for those of us who depend on their savings and investments for living expenses (e.g. the elderly and soon-to-be-retired), because these types of money have taken a major hit and will probably go even lower.

But on the other hand, Mr. Stiglitz makes a persuasive case against the bailout and for bankruptcy. Here's an excerpt:

The debate about whether or not to bail out the Big Three carmakers has been mischaracterised. It has been described as a package to help the undeserving dinosaurs of Detroit. In fact, a plan to bail out the carmakers would benefit shareholders and bondholders as much as anybody else. These are not the people that need help right now. In fact they contributed to the problem.

Financial markets are supposed to allocate capital and monitor that it is used to good effect. They are supposed to be rewarded when they do that job well, but bear the consequences when they fail. The markets failed. Wall Street’s focus on quarterly returns encouraged the short-sighted behaviour that contributed to their own demise and that of America’s manufacturing, including the automotive industry. Today, they are asking to escape accountability. We should not allow it.

What needs to be done is to help the automakers get a fresh start and allow them to focus on producing good cars rather than trying to juggle their books to meet past obligations.

The US car industry will not be shut down, but it does need to be restructured. That is what Chapter 11 of America’s bankruptcy code is supposed to do. A variant of pre-packaged bankruptcy – where all the terms are set before going before the bankruptcy court – can allow them to produce better and more environmentally sound cars. It can also address legacy retiree obligations. The companies may need additional finance. Given the state of financial markets, the US government may have to provide that at terms that give the taxpayers a full return to compensate them for the risk. Government guarantees can provide assurances, as they did two decades ago when Chrysler faced its crisis.

Source.