Paul Krugman on the Bailout for the Big Three

Question: What is the proper way to bailout the Big Three?

Paul Krugman: I think it’s a combination. I think it’s essentially bankruptcy, bankruptcy with safeguards, that you have credit lines, we have this mechanical thing, which is that [IB] financing, which you need to just to do business is not available in the current market. So, at chapter 11, if you try it, immediately it turns into liquidation because the credit isn’t there, so you have the credit lines from the Federal Government just to keep the thing running. And then, on top of that, you probably need something like warranties for car buyers, because there’s the real problem will you buy a car from a company that is, you know, that is bankrupt and may not be producing those cars. That’s possible, and I leave this to the legal minds. It may be necessary to have a bankruptcy but not in name, that essentially you have a government seizure but you don’t call it bankruptcy, because the word bankruptcy itself will scare off the buyers. But, you know, they cannot be allowed to simply slide into the, into whatever would be, I guess Lake Michigan. Not into the sea, but into the big lake. Not right now, anyway. But, on the other hand, you know, we’re not in the business of letting management and stockholders off the hook.

Krugman describes bankruptcy with safeguards.

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