People like to talk about a downward spiral, but the market has a mechanism for recovering on its own: As firms go bust, the survivors can charge higher prices, make fatter margins and thrive anew. This is already starting to happen on Wall Street.
NYT: Bundles of debt are being issued at a pace not seen for months. Some securities on bank books are starting to recover in value. And banks are charging hedge funds and other clients lofty fees for their trades, something they were not able to do when markets were flush and more banks, like Lehman Brothers, were around to compete with.
“This is going to shock investors, who think the news is always bad news for these companies,” Richard X. Bove, an analyst with Rochdale Securities, told The Times. “Money’s coming in. Money’s flowing into the financial markets.”
This is one reason why it’s so important to let failed firms fail, rather than attempt to prop them up. The competitors need that breathing room, the period in the Darwinian cycle where they’re the kings of the savanna, replenishing their coffers, feasting on their competitors’ carcases. Otherwise, we really could get a downward spiral, as everyone remains notionally alive, but visibly malnourished.