As the economists and accountants should know, sunk costs are just that: sunk. You are not going to recoup them and they should not be impacting upon your decision-making processes. However, strangely enough, because of all that has been sunk into them certain people hold that there are things which are “too big to fail”. Nothing is “too big to fail”. Everything does, eventually. If it’s hemorrhaging and you have to prop it up with external resources because it can’t survive in its current form and it doesn’t have long-term viability either because making it viable in the long-term is impossible or fails in terms of cost-benefit, let it go.
As the Buddhists say, it’s attachment to false reality which leads to suffering. The reality is that it has already failed. The false reality people cling to is that there’s something to salvage other than wreckage. They’ll keep on lying to themselves for as long as they can and when they finally accept reality as it is, the shock to the system will be all the worse, particularly as they’re essentially wasting more of their own (or others) resources trying to resuscitate a corpse. Government should not promote this kind of thinking and nor should they try and rid people of the consequences of being involved in such failure. To do so is to encourage moral hazard, particularly as a common government response has been to socialise losses (while allowing private profit).
For recent reading related to this in the New Zealand context, go here.
[Update: Read “Propping up the finance companies” and “Thoughts on South Canterbury Finance saga” as well.]
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