Time For The World To Turn The Page To Chapter 11


Nick Potts
28-2-09
Southampton Solent University
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Stiglitz (2008) is right to suggest that the big three US carmakers should not 
be bailed out but rather, should be placed in Chapter 11 pre-packaged 
bankruptcy.  This essentially means the business continues to operate after it 
is financially wound down, to the cost of shareholders and holders of 
corporate bonds issued by these carmakers.  The company starts again fresh 
from debt, with the government potentially applying new capital and repairing 
holes in that company’s pension funds.  The government still faces a cost but 
does not use public money to help past investors in these companies.  Of 
course ‘ordinary’ people may be effected through their pension funds; but as 
Stiglitz points out such problems would be best specifically addressed by the 
government, rather than by general state support of investors/wealth 
holders.  Stiglitz (2002) advocates a Chapter 11 type procedure for developing 
countries in financial crisis, with western investors in such ‘emerging markets’ 
consequently loosing out.  He suggests that IMF support has simply tended to 
limit western investors losses in such crisis leaving the ‘helped’ country with 
the bill of increased debt (and western investors sufficiently unburnt to pick a 
new emerging market to unsustainably flood with capital).

Now it is the governments in ‘advanced’ countries, who have much more 
ability/power than developing countries’ governments to make a genuine 
political choice, which must decide what it is they really want to spend the 
public’s money on during recession.  Essentially the problem is a political 
problem, a matter of class.  The top 10% (5%, 1%) of the population in 
advanced countries hold the bulk of the west’s wealth, so Chapter 11 
bankruptcy of productive firms and complete bankruptcy of financial firms 
would hurt them most, but it would hardly leave them destitute.  In contrast 
using public money to prevent the bankruptcies of highly indebted firms and 
financial institutions to limit private investors’ losses will, as we shall explain, 
only help these private investors and actually make recovery from recession 
more difficult.  Clearly wide-scale bankruptcies would hurt workers’ pension 
funds, but the government could step in to fill the gap.  Likewise to prevent a 
domino effect the suppliers of bankrupt firms must be paid  (but not the 
betting partners of bankrupt financial sector firms); the government should 
thus prudently use public money to stop this domino effect. 

Whereas pre-pack bankruptcy should be the first option considered for 
productive firms it should not be considered for firms in the financial sector.  If 
a financial firm is considered ‘too big’/key to the productive sector (such as 
retail banks or mainstream insurers) it should be simply nationalised without 
compensation.  Financial firms whose business lies in the financial system itself 
should simply be allowed to go bankrupt, no matter the domino effect.  Where 
an institution is a combination of both types of financial firm the government 
must only nationalise the good (engaging with the productive economy) part 
of the institution and not its bad gambling arm.  This would actually enforce 
the end of the moral hazard problem in the financial system that many believe 
has shaped the pattern of financial crisis throughout the world in the era of 
globalisation.  We may end up with a small private banking sector and a larger 
state banking sector, but if it lends to support the productive economy, rather 
than supporting financial adventures, how can it be less efficient than current 
private banking?  In the end when recovery is well set state owned banks 
could be privatised to reduce government debt.

None of this will however help us to avoid a deep recession, but it will, as we 
shall explain later, lay the foundations for future recovery.  The knock to 
confidence is so large that a sharp fall in business investment is already 
producing a sharp recession around the globe.  Neither the government nor 
the public can immediately fill this gap in demand e.g. orders for new ships 
have already halted.  Rather than going on a ‘ship buying spree’ the public 
needs to examine how it has been the victim of usury i.e. people often being 
lent what they can not realistically hope to repay.  Chapter 11 bankruptcy is 
the best option for many highly indebted households (whether the household 
becomes unemployed, underemployed, or even maintains employment).  To 
continue ‘business’ households need their house, repossessions, or rather 
forced relocations, must be avoided.  The government must buy the house of 
households going through their form of Chapter 11 bankruptcy at the current 
market price and then rent it to the household.  The government has bought a 
solid asset, which is likely to appreciate, to directly help a household, not a 
toxic financial asset, with uncertain future value, to directly support 
investors.  We have an instant and exciting reinvigoration of social housing, 
with new ‘council houses’ being randomly distributed rather than as in the past 
being concentrated in sink estates.  With the recession set to be sharp a 
substantial rise in unemployment is inevitable, so I suggest that if the 
government wishes to help stimulate demand that it should substantially 
increase rates of social security.  The unemployed would still be worse off, but 
the pain of unemployment must at least be eased, while those who retain their 
jobs benefit from lower prices in the recession anyway.

So we let the wealthy take the biggest knock and all endure recession, but 
how will recovery come?  The measures I have outlined provide a degree of 
support for the real economy; they may be sufficient to allow a bottom to be 
reached, if not then it is time for the government to become spender of the 
last resort.  But we should not despair of where the demand will come from 
after the bottom is reached, it will, sooner or latter depending on confidence, 
come from increased business investment.  But why would firms want to 
invest?  To make a profit!  The crisis reduces both the financial (fictitious) 
value of companies and the value of their real capital (machines, buildings etc 
as they drop in price).  Once losses are written off and the financial value of 
firms is reshaped, including by Chapter 11 bankruptcy, profit will be assessed 
against this lower capital value.  Even if profits are initially below pre-crisis 
levels their rate is likely to be higher because capital values have been 
depressed.  Indeed it is precisely because the preceding boom raised capital 
values faster than the mass of profit that laid the ultimate foundation for 
crisis; capitalism gets itself into the mess.  Now in crisis the depression of 
capital values lays the foundation of recovery; capitalism gets itself out of its 
own mess.  As Marx (1981) made clear so long ago capitalism inevitably 
periodically defeats itself, the tendency for the profit rate to fall in times of 
accumulation/boom makes periodic recessions to restore the profit rate 
inevitable.

Of course the government should try to manage the situation to prevent the 
possibility of a lengthy period of stagnation between crisis and recovery, but it 
can not, in a capitalist system should not, imagine it can avoid 
recession/magically immediately repair the economy.  To avoid crisis 
altogether forever is another story, beyond capitalism, and also it would seem 
beyond the current level of organisation (disorganisation) of the working class 
in advanced countries.  The question is whether the working class in 
advanced countries has enough strength to ensure it is investors/the wealthy 
who bare the brunt of recession as capitalism as a system is 
maintained/protected.  If in contrast governments attempt to preserve private 
wealth the recession in the real economy is likely to be deeper and longer, 
ensuring peoples’ confidence in capitalism will be further eroded.


K. Marx (1981) Capital: A critique of Political Economy, Volume III, 
Penguin/Vintage Publishers edition, London and New York.

J. Stiglitz (2002) Globalization and its discontents, Penguin, London and New 
York.

J. Stiglitz (2008) ‘Chapter 11 is the right road for America’s carmakers’, 
Financial Times, 12th of December, pp.11.