Bankruptcy & Bailouts; Subsidies & Stimulus: The Government Toolset for Responding to Market Distress

Abstract

In this article, I attempt to clarify the appropriate government tools for responding to different forms of market distress in times of crisis. I provide my analysis in the context of the United States responses to market distress related to the COVID-19 pandemic.

With the exception of measures related to financial markets, those responses formed a chaotic mix of disconnected half measures that neither stabilized the economy nor provided meaningful relief to those most affected. While that failure may be attributable in part to general government dysfunction and legislative gridlock, a large part of the problem arises from the lack of a clearly identified purpose and framework to guide government responses.

The lesson here is that the tools deployed by governments to alleviate a crisis should depend on the nature of the specific problem at hand, and scattershot approaches are unlikely to work. As obvious as that principle may seem, it was largely ignored in 2020, and much of the confusion in the pandemic responses can be attributed to attempts to use the wrong tools and from implementation of measures that lacked any clear purpose.

After reviewing the actual response, I lay out a framework for identifying the right tools. I suggest four types of market distress--specific economic, systemic economic, specific financial, and systemic financial--each with a corresponding category of appropriate government responses (respectively): direct subsidies, general stimulus, bankruptcy proceedings, and financial bailouts. I describe the relationship between the category of tools and the type of distress. I also provide a close look at and place special emphasis on the interaction between pandemic responses and bankruptcy law as bankruptcy’s role has been the most obviously misunderstood and provides the starkest example of confused analysis.

Keywords: Bankruptcy, Bail-out, Reorganisation, COVID-19 Distress; Chapter 11

JEL Classification: D61, E62, G18, G33, K22