The following is an excerpt from a conversation. Critique it.

Appleton:

If banks don’t do it, someone else will.

Butterworth:

I’m sure that’s true, but the question is one of comparative advantage and deadweight losses, that is,

reinventing the wheel. For instance, take the example of DIP (Debtor-in-Possession) financing. There’s nothing in the law that says only banks can provide it but banks are the biggest players in that market. It’s not a mere coincidence.

Moderator:

I guess it’s not surprising that the DIP financing market has grown so much, given the debt binge of American corporations in the last decade. I personally fi nd the whole debt-restructuring process, and particularly the role of banks in it, quite fascinating. But I do fi nd it ironic that banks are engaged in this at a time when borrowers are complaining about credit rationing by banks.

Appleton:

I think this concern with credit rationing is overdone. First of all, I don’t really believe banks ration credit, and if they did, it would be irrational. I’m not in the habit of worrying about why someone may want to smoke a $5 bill! Moreover, a borrower who is rational could always go elsewhere. But honestly, I have yet to see a convincing study that shows that banks ration credit.

Moderator:

Come now, Alex! Do we need a convincing empirical study substantiating every little truth?

Butterworth:

Please don’t answer that, Alex. The fact of the matter is that it is possible to explain credit rationing as a rational practice. And this view that a rationed borrower can go “somewhere else” is not surprising coming from you Alex, since you don’t believe banks are special anyway.