Is It Cause For Alarm When Bottom Tier Companies Fail?

Implications: There are two glaring problems with this New York Times Article.   First of all, its' headline is very misleading and designed to stir up controversy, while the body of the article is a well reasoned and evenhanded analysis of a far less disturbing trend. One could almost finish reading this with a positive feeling about the sudden realization of certain lenders that they should think twice about lending lots of money to people that could not pay it back!  Next, while it further verifies what readers of GLG News have been reading about for many weeks; that the real reason behind this wave of bankruptcies has less to do with the current recessionary economy than with the ridiculous levels of debt that these bottom tier retailers have been carrying, it only deals with this issue "in the fine print" at the end of the article.

Analysis: Reading the list of retail companies that have recently filed for bankruptcy and/or reorganization creates the impression that the depression is upon us. Is this alarmist journalism just trying to sell newspapers or is there some basis in reality for its' urgent tone? 

Linens 'n Things, Levitz, Sharper Image, Fortunoff, Lillian Vernon, Harvey Electronics, Bombay, BombayKids, Domain & Wickes reads like a list of impressive retailers who have earned the right to survive were it not for the big, bad, recession.

Not so, says I!

A closer look at every one of these companies shows a sharp decline in operating profits in recent years combined with an equally sharp increase in debt loads.

Even great companies file for bankruptcy when they are saddled with an unreasonable debt loads. One needs look no further than the late 80s and study how Federated Department Stores (now Macy's) was the leading department store organization in the world when it was acquired by an inexperienced Canadian homebuilder with the help of some fee-hungry investment banks. In the blink of an eye they went bankrupt , reorganized and freed from the ridiculous debt loads placed upon it, quickly regained its' position as the worlds best department store group.

If I may be allowed a biblical reference, the natural order of things have frequently experienced "7 good years followed by 7 lean years". We can also look to Darwin to better understand the notion of "survival of the fittest". I submit that this is no more significant an event than the normal and necessary "thinning of the herd". I also want to submit that the herd never needed more thinning than today after it had swollen in size from the constant feeding on cheap money and irresponsible lending practices. 

It happened in the residential sector and it is happening in the retail sector.  Furthermore, I submit that this is a good thing just like in nature where the healthy members of the herd will have a better chance to survive when not burdened by the weak and unhealthy members slowing it down.