The Economy as A Beehive, NOT A House of Cards
At the micro level, the failure of an institution is often a disaster to those with a personal stake. But from an overall perspective, when one institution becomes insolvent, another can be relied on to pick up its functions.
It's widely assumed that a large enough wave of bankruptcies will bring the economy down. Little or no credit is given to the ability of the economic system to heal itself and find its way back to vitality.
What's excessive now is fear, not debt: Fears of insolvency and private-sector indebtedness are misplaced and harmful. They place obstacles in the way of ill-used capital that seeks to move toward safer and more profitable employment. They plunge the stock market into turbulence. They push government into hasty actions that intrude more aggressively into private choices and decisions. They undercut the market-price system, without which the economy cannot allocate resources productively. Last but not least, these fears trigger the proverbial false alarm in a crowded theater, sending everyone stampeding for the exits.
Editorial in today's WSJ by David Ranson
MP: We operate under a "profit AND LOSS" system, and as painful as they are for some people, business losses and bankruptcies are an important part of the economy - they reallocate resources that are being used unwisely towards productive uses that are more highly valued by the economy at the macro level. When there are business failures, resources (property, plant, equipment, capital, human capital, labor, real estate, land etc.) don't ever disappear, they just get reallocated.