What is the governments reason for bailing out these big corporations, especially the recent AIG bailout? Sure, having these guys go under could hurt an already delicate economy, but this is a free market, i think another corporation would step in and take over those former AIG customers, causing them to hire more employees.
Or is this more like an investment for the government? Yahoo has a great article about it today. In it they say the loan is $85 billion with an 11.5% interest rate. Plus they get a 79.9 % stake in the company.
I guess my question boils down to this: what is the government trying to do more with this bailout, save jobs, or make money?
Basically, neither. They want to keep the economy from having too many changes. In times of rapid (and in thsi case, negative) change, people tend to panic. In order to prevent this, as well as guarrantee certain financial instruments, the government bails out the financial sector. It would be a different if this were GM or whatever, of course.
The financial industry is the only true faith-based industry in existence. It creates money out of thin air. Crazy amounts of money.
Charles R. Morris, The Trillion Dollar Meltdown:
If a firm like General Motors were to go under, it would cause enormous short-term pain for hundreds of thousands, maybe millions of people. But other companies in the field would likely benefit. Most sales would move to the other companies, most workers would be rehired, most suppliers would switch.
In the financial world, a large cascading failure just makes money vanish. Assets are taken out of the world economy. Loans become harder to get. Credit becomes more expensive. The world economy runs on loans and credit, as well as the money generated by these financial devices. That allows companies to form, buildings to be built, infrastructure projects to be undertaken. Taxes are collected on all these, which also vanish when they go away. See this thread.
Now it’s true that the fundamentals of our economy are strong. (Yeah, I know.) Even a trillion dollars is only 7% of the U.S. GDP and 1.5% of the world GDP. That’s a huge kick, but not an insupportable one.
Anything larger than a mere trillion would do serious, serious damage for possibly a generation. Only WWII brought the U.S. out of the Great Depression and I don’t want that as a solution to our problems.
Should the government step in to prevent that level of catastrophe? I think, on balance, the answer is yes. The government also needs to step in and impose regulations on the industry so that it cannot happen in the future.
Morris cites Arthur Schlesinger Sr. about a liberal to conservative 25-30 year cycle in the political and economic communities. He says we are at the end of the Reagan conservative cycle and that a liberal, more regulated, cycle is needed.
He also says that it’s time for CEOs to stop lying (or being willfully ignorant) about the state of their firms. We need to know how badly off firms are so that steps can be taken before they fail. That would help keep the government from needing to step in.
P.S.
A line in that Yahoo article dropped my jaw:
Really? You were kicked out of AIG three years ago but you still had your entire net worth in AIG stock? Man, you must be the worst CEO ever.
P.P.S.
Somebody is sure to come in and ask why, if financials run on faith, we don’t go back to a gold standard. The answer is that gold has no intrinsic value. Which would you rather base your economy on: faith in the entire value, present and presumed increased future, of our incredibly wealthy beyond all dreams of history economy, or faith in the imaginary and utterly arbitrary value of a piece of metal? The former is a faith that atheists of all stripes can agree upon. The latter is a bizarre cult religion. As long as nothing exists on the planet with an actual intrinsic value that can be commoditized and traded, then basing the value of money on the entire economy is the only successive alternative.
But it’s not only the government, companies routinely bail each other out.
For instance in the early 90s FOX (now NewsCorp) was basically borrowing money from one bank to pay off the loan to another bank. They did this all the time.
Then a Pittsburgh bank said “No you do this too much, we’re calling in the money”
So Murdoch met with other bankers and they refused him a loan. His entire business was about to collapse. So Murdoch went to the bank and said, “Look if you call in the loan, I go under and you get nothing.” Long story short, the bank rolled it over, and Murdoch later got his FOX network to pull a profit and everything was fine.
Well THIS time. As you can see Murdoch only needed better times (and Football) to make his investment payoff.
But if that Pittsburgh bank had been hardnosed there would most likely be no fourth network, the bank probably would’ve had financial difficulties and so.
So bail outs are ways of helping companies that MAY still be able to pull themselves together.
It depends on how the bailout is structured, in part.
When the Feds bailed out Chrysler in the early 80s, the bailout package was structured so that if the company recovered, the taxpayers (well, the Treasury) got their money back. That was one of Reagan’s best moves as President - he bailed out Chrysler, saving thousands of jobs, but ensured that when times were good again the money would be repaid.
The post-9/11 airline bailouts contained no such provisions, and the no-doubt-forthcoming financial industry bailouts almost certainly won’t either.