[OPE-L:115] [OPE-L:351] bankrupties and the Asian crisis

Fred B. Moseley (fmoseley@mtholyoke.edu)
Mon, 23 Nov 1998 14:56:20 -0500 (EST)

I finally have a little time to comment on the very interesting and
important question raised by Michael P. and Andrew T. and others about
the role and necessity of bankruptcies in the current Asian crisis.

I think we need to distinguish more clearly between the bankruptcy of
non-financial corporations (which I will call "firms") and the bankruptcy
of banks. The two are related, but they are not the same.

As I see it, the fundamental problems in Asia (and I think the world
capitalist economy) are:
1. Falling rate of profit.
2. Excessive (unsupportable) debt burdens of firms.
3. Excess capacity, created by excessive competition and
excessive borrowing.

In the worst cases, the inability to repay debts forces firms into
bankruptcy. But even if firms survive, as long as they face these triple
problems, it is highly unlikely that they will invest in new capacity.

The debt problem of firms in turn produces a loss crisis for banks. If firms
are unable to repay their loans, this causes losses for banks. If these losses
are large enough and approach the total capital invested in the banks, then
the banks themselves may be forced to close (i.e. go bankrupt). I don't
see how there can be a solution to a banking crisis unless there is a
solution to the underlying debt problems of firms. At the same time,
banks in crisis will restrict their lending to firms (a "credit crunch"),
which in turn will exacerbate the latter's debt problems.

If this analysis is correct, then the necessary preconditions for a recovery
from the current crisis would seem to be: (1) increase the rate of profit,
(2) reduce the debt burden of firms, and (3) eliminate excess capacity.
All of these preconditions could be satisfied, and historically have been
satisfied in depressions of the past, by the widespread bankruptcy of
capitalist firms. The bankruptcy of firms:
1. devalues capital and hence raises the rate of profit for surviving firms.
2. wipes out significant portions of the existing debts of firms (such that
the surviving firms have a smaller, and more supportable, debt burden).
3. eliminates excess capacity and competition for surviving firms.

Unfortunately, of course, widespread bankruptcies also propel the
economy deeper into depression. And we can't be certain when, or even
if, a new period of expansion will begin out of this "slaughtering of

Therefore, the critical question for the world capitalist economy at the
present time would seem to be: can these preconditions for recovery be
satisfied WITHOUT widespread bankruptcies and a deeper depression?

There are at least the following possible alternatives all of which are being
considered by some nations today (and probably will be considered by
more nations as the crisis worsens)

1. Banks could write down (or "forgive") at least some part of the debt
of firms. However, banks would thereby suffer losses, similar to the
case of bankruptcy (except perhaps smaller losses). Perhaps governments
could compensate the banks for their losses (at least partially), i.e.
could turn private losses into public losses. One important question
here would seem to be: are there limits to the government's ability to
absorb private debt? If so, what are these limits? In any case, although
the debt is made more manageable by this alternative, capital is not
devaluated, the rate of profit is not increased, and excess capacity is
not eliminated.

2. Governments could take over some portion of the debt of firms. The
effects of this alternative would seem to be pretty much the same as
alternative #1 above.

3. Government could adopt expansionary policies that result in inflation.
This alternative would make it easier for firms to repay their debts.
However, once again capital is not devalued and the rate of profit is not
increased. Perhaps excess capacity is reduced somewhat by the expansion
of demand, but it is unlikely to be entirely eliminated.

What do others think about this? Are these the preconditions for recovery
from the current crisis? Will one or more of the alternatives above suffice
to fulfill these preconditions for recovery? Or, are bankruptcies and a
depression the only way to satisfy these preconditions? Are government
attempts to avoid the bankruptcies only prolonging the crisis?

I look forward to further discussion.