Spring Break
Selecting the best: Why some bailouts are better than others
Scott Conover
Issue date: 1/9/09 Section: Forum
The current bailout situation looks to be snowballing. From the financial industry to the newspaper industry, numerous companies are requesting assistance from the federal government. As the economy moves in its natural cycle from growth to recession, many companies are striving to keep from going under by receiving an artificial injection of cash from the U.S. government. Not only is this a poor economic model for encouraging strong company growth and innovation, but it also provides a framework in which shareholders and companies they own are rewarded for bad decisions.
In fact, it would seem that these mass bailouts are more for the benefit of these shareholders, domestic and foreign, rather than for the people who are employed by these companies. Bailing out weak companies would also not seem to be a good plan for the general well-being of the United States in the world economy. Therefore, why do many people find the bailouts to be a necessary evil, when they are an economic evil in themselves in many cases?
Bailing out most companies is simply a bad idea. Companies in a free market economy are supposed to function in an environment that stimulates competition. However, a bailout, which is universally given only to huge companies, rewards firms for failing in this otherwise relatively fair economy. The government is dancing on the head of an economic pin by essentially arguing that bailouts are necessary to prevent a huge collapse of the American economy and to preserve special American functions, such as jobs and job types that specialize in the American markets (like the automotive industry), or AIG and Fanny Mae and Freddy Mac, who engage in specialty functions which are not easily duplicated elsewhere.
This sort of bailout, although curious, is not the bailout which is strange and contrary to American interests. The United States is a political entity, and preserving the few automotive companies, which employ thousands in their primary industries, and create more demand in support industries, is just good politics for a nation weakened by mortgage follies. Similarly, allowing AIG, Fanny Mae and Freddy Mac to fail could have caused a massive recession through excess loss of capital and tying up important capital resources.
In fact, it would seem that these mass bailouts are more for the benefit of these shareholders, domestic and foreign, rather than for the people who are employed by these companies. Bailing out weak companies would also not seem to be a good plan for the general well-being of the United States in the world economy. Therefore, why do many people find the bailouts to be a necessary evil, when they are an economic evil in themselves in many cases?
Bailing out most companies is simply a bad idea. Companies in a free market economy are supposed to function in an environment that stimulates competition. However, a bailout, which is universally given only to huge companies, rewards firms for failing in this otherwise relatively fair economy. The government is dancing on the head of an economic pin by essentially arguing that bailouts are necessary to prevent a huge collapse of the American economy and to preserve special American functions, such as jobs and job types that specialize in the American markets (like the automotive industry), or AIG and Fanny Mae and Freddy Mac, who engage in specialty functions which are not easily duplicated elsewhere.
This sort of bailout, although curious, is not the bailout which is strange and contrary to American interests. The United States is a political entity, and preserving the few automotive companies, which employ thousands in their primary industries, and create more demand in support industries, is just good politics for a nation weakened by mortgage follies. Similarly, allowing AIG, Fanny Mae and Freddy Mac to fail could have caused a massive recession through excess loss of capital and tying up important capital resources.
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