Feature

Bankruptcy’s economic benefits

Americans get a lot of flak for being bad debtors, but maybe bankruptcies are just what the economy needs.

Michael Casey
MarketWatch.com

Americans get a lot of flak for being bad debtors, said Michael Casey, but maybe bankruptcies are just what the economy needs. Our system “treats failure as a necessary, if unwelcome, element of entrepreneurship.” By accepting job losses and business failures as a fact of life, our economy provides itself with a chance to do what it does best: renew itself. Compare that with Europe, where people “are straitjacketed by laws that make it near impossible to have their debts forgiven.” Household debt in the euro zone has barely fallen since the crisis in 2008, so you can bet it will take European consumers “a lot longer than their American counterparts” to start spending. And since the U.S. economy has a better mechanism for clearing its debts through the bankruptcy process, expect the greenback to have a much brighter future than the euro. Of course, nobody wants to end up in bankruptcy—“the immediate consequences are bad for both the debtor and creditor.” But the process provides a crucial “mechanism for cleansing the financial system.” When the slate is cleared, everyone gets a chance to dust themselves off and try again.

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