MEANING OF BAILOUT
Bailouts Are a Good Thing
This essay explains how the meaning of the word “Bailout” has been changed to refer to something as disgraceful or shameful, instead of referring to something in a positive context, such as the benevolent act of helping another in trouble. The subject of “bailouts” is explored against the background of the financial crisis of 2008. Points, counterpoints, and rebuttals serve to examine both of the ways in which “bailout” is used, and proof is provided to reinforce why the term should only be used with a positive connotation.
The meaning of the term “Bailout” has been changed into a politically-charged perversion of what is actually a noble act of lending help to another. In the article “Bailout Baloney” by Justin Quinn (2008), the term “bailout” is used to describe any government monetary assistance program, such as the Recovery Act , with the negative connotation of rewarding fiscal ineptitude. It is implied that this “reward” is wasteful and inefficient by spending precious government resources on the dysfunctional business model of a failing industry at the expense of the American taxpayer population. But the Oxford Dictionary describes a “bailout” as “an act of giving financial assistance to a failing business or economy to save it from collapse” (Bailout, n.d.). Saving our economy from collapse is never a bad thing. A “bailout” is an emergency countermeasure, when a situation is so desperate that this last resort must be used to prevent further harm. The financial assistance or “bailout” that the U.S. Government provided to the banking industry in 2009 was necessary to protect the fragile state of the U.S. economy from a catastrophic economic collapse, something that an over-reliance on free-market principles is unable to do.
Government “bailouts” are a way to protect the major players in our vital industries, and even the U.S. economy itself, in times of financial crises. The Merriam-Webster dictionary (Protect, n.d.) defines the term “protect” in this context as “to maintain the status or integrity… especially through financial or legal guarantees … as to save from contingent financial loss.” In the past, when national or global factors threatened to harm the status or integrity of the U.S. economy, the government provided financial assistance in order to bolster specific companies or institutions (Smith, 2011). This was done to stimulate short-term liquidity and solvency of those industries because they were interconnected to many other economic sectors. To help these types of companies would be to help the economy as a whole. These “bailouts” did just that, saving the major players in these industries from contingent financial loss, which produced an overall positive economic effect for the country.
Fiscal conservatives would argue that we should not invest so much to save failures, and instead invest in winning players. In a Harvard Business Review article, Bill George (2012) stated that “America has repeatedly demonstrated its capacity to develop entrepreneurs who start with revolutionary ideas and create global companies that dominate their markets.” If America’s economic success relies on our innovation and entrepreneurship , to offer a “bailout” would not be conducive to maintaining our economic standing on the world stage. The $700 billion spent through the TARP program was the largest instance of government spending in history (Nankin, 2008). Instead of giving that money to key players in the financial industry, that money may have been better-spent feeding the poor, developing ways to reduce energy dependence on foreign countries, or perhaps investing in education so future generations would be more competitive in a global economy.
But the government stepping in to protect the economy is sometimes required when those who work within the system serve only themselves, with a lack of moral responsibility to their country. Randy Martin (2010) argues that no one has been able to demonstrate that “private selfishness turns into public altruism.” Even President Ronald Regan, the poster child of conservatism, stated “There is a legitimate need in an orderly society for some government to maintain freedom or we will have tyranny by individuals” (Klausner, 1975). Occasional government intervention is a way to ensure the stability of the economy, and in the above quote, Ronald Regan has equated a “bailout” with the ability to “maintain freedom.” In the absence of personal or moral responsibility, certain measures may be necessary to protect the economy, but critics claim that the economy was not actually in a fragile state, and there was no need for the government to intervene.
Cyclical economic swings have occurred throughout history, which would indicate that the economy is not in a fragile state, and the 2008 downturn is an expected behavior which does not need to be regulated. I am not a fiscal conservative, but I acknowledge that the market periodically rises and falls, and some naturally-occurring events should not be meddled with by government intervention. A small-scale example of such an event is the apartment rental market in my home town. When the local universities are in session, rent costs are high, and when each term ends, the rent costs are low. On the national scale, removing restrictive laws would allow the market to more fluidly self-regulate and more truly reflect how investors value companies within our economy. Unfortunately, strictly following this philosophy where markets are not regulated produces a majority of “losers” and minority of “winners.”
To elaborate on this point, and taking it to the extreme, suppose America’s airline companies were not regulated by the FAA because they considered the regulations to be too costly, and ensuring proper airplane maintenance should be left solely to those in the private sector. The airlines would definitely benefit from cost savings resulting from the removal of the protections against airplane failure, but the passengers would be the ones who are most at risk of losing their lives at the hands of the potentially negligent airline companies. Now imagine if this gross negligence would cause the airline companies to face multiple million-dollar lawsuits resulting from hundreds of simultaneous plane crashes. If the airline industry was the backbone of America’s transportation infrastructure, and if the major players in the airline industry were to go into bankruptcy or be unable to operate, then America as a whole would suffer the same crippling financial loss as the industry itself. In this hypothetical scenario, the benefit of government intervention would be necessary to prevent further harm to the country’s economy, to “bail it out” of trouble. Returning this line of reasoning to the real-world scenario of the financial crisis of 2008, the self-serving decisions by multi-national investment firms left the economy in a fragile state, and since finance is so intertwined with every aspect of our economy, a catastrophic economic collapse was imminent.
The ultimate goal of the “bailout” given to America’s major investment firms was to prevent a domino effect of financial failures, which would have eventually led to a catastrophic economic collapse. Under normal conditions, government intervention is not required, as regulations prevent the decisions and actions of the self-serving from adversely affecting the economy. But the 1999 repeal of the Glass-Steagall law, a lack of regulatory oversight, and the over-leveraging of lending institutions were contributing factors to the financial crisis. This removal of safeguards compelled a government “bailout,” which came in the form of a cash injection to banks, just to keep business operating across all industries (Andrews & Landler, 2008). Without operating capital, wages could not have been paid, debt obligations could not have been honored, and business would have grinded to a halt. However, there is a moral hazard to the government assistance. A signal is sent to private companies that no matter how risky their decisions may be, the government will be there to save them in the future. If the U.S. Government dispenses “bailouts” to private companies any time they are in financial trouble, then institutions do not have to worry about economic collapse, and they can continue to behave recklessly, which is not a free-market principle.
Critics of bailout programs like the Recovery Act claim that “governments cannot pick winners and losers more effectively than the [free]-market, since governments have imperfect information and insufficient knowledge of the national and global business environment” (Choi, Berger, & Kim, 2009). Ron Paul stated (Paul, n.d.) that letting companies fail would be a better solution than “confiscating money from productive members of the economy and giving it to failing ones.” Joseph Stiglitz asserts that “in a [free-] market economy, there has to be a sense of accountability. You can’t come running to the government every time you have a problem” (Herman & Mayerowitz, 2008). On a smaller scale, letting companies fail may be a viable solution, but for industries which are so ingrained into every aspect of our economy, to do so would have dealt a fatal blow to America’s ability to sustain its economic health. AIG was the major underwriter for insuring investments, and when the financial crisis left AIG unable pay out for insurance claims, it threatened to stop all credit transactions in America. The “bailout,” which came in the form of an injection of cash to the investment banks, may have been against free-market principles, but was needed to correct the “rules that permitted companies to offshore jobs, reduce real wages, and permit risky financial practices” (Kozy, 2009).
Government “bailouts” may be controversial, but there is a need to protect something as important as the economy when it is in a fragile state and on the verge of economic collapse, since the free-market does not care who is a “winner” and who is a “loser.” The need to protect something when it has been left in a fragile state is justified, especially when it is something as vital as the U.S. economy. The health of our economy is not something we can simply experiment on with short-sighted, laissez-faire ideologies, since the failures of large financial institutions “could be contagious” (Boyd, 1994). To allow these institutions to fail would most likely cause the confidence in our fundamental institutions to spiral towards economic collapse. Though our country has historically embraced free-market principles, there are times when we cannot simply allow portions of it to fail, which is why “bailouts” are a valid safety measure against systemic failure. A “bailout” should not be used to describe something in a negative manner, but instead be used to describe a beneficial action meant to save those in need. I can recall some of the general uses of the term I learned when I was younger, like to “bail water out a boat” when a vessel is sinking, or to “post bail” for someone who has been arrested. These uses indicate providing aid to someone so they may exit from a bad situation. The term “bailout” should not be viewed in the same light as whatever decisions a troubled party made to get themselves into harm’s way. On the contrary, providing a “bailout” is, at its very core, a compassionate act meant to save others from endangering themselves further. A “bailout” stopped the hemorrhaging and ensured long-term economic stability (Chu, 114). A “bailout” saved the automobile manufacturing industry . A “bailout” prevented the country from turning on itself in desperation. “Bailouts” are a good thing.
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� The U.S. Recovery Act was a financial reform program implemented in 2009, and provided monetary assistance to lending institutions to restore confidence in America’s economy (Landers, 2011).
� Fiscal Conservatives and Libertarians alike believe in limited Government, and that Government financial assistance is counterproductive to a successful capitalist society, such as the United States (Fiscal Conservatism, n.d.).
� In contrast to the sheer manufacturing power of countries like China, or the inexpensive labor of less-developed foreign countries, creativity and ingenuity are cornerstones of America’s competitive advantage in our global economy (Porter, 2009).
� The Troubled Asset Relief Program, or TARP, was a U.S. Government program to purchase assets and equity from financial institutions to strengthen the financial sector.
� The Federal Aviation Administration regulates commercial airlines in regards to safety, efficiency, and environmental responsibility (Mission, n.d.).
� Citigroup, Wells Fargo, JPMorgan Chase, Goldman-Sachs, and Bank of America were just some of the companies which received bailout money (Bailed out banks, 2009).
� The Banking Act of 1933, also referred to as the Glass-Steagall Act, limited commercial bank securities activities and affiliations between commercial banks and securities firms. This prevented commercial banks from commingling client money with security reserves for trading purposes (Barth, J., Brumbaugh, D., & Wilcox, J., 2000). This deregulation was considered one of the major contributing factors of the 2008 financial crisis.
� American International Group, Inc. is a leading international insurance organization serving customers in more than 130 countries (AIG).
� I acknowledge that term “Bailout” was improperly affixed to the U.S. Automobile manufacturing industry here, since the financial assistance received was actually a short-term “bridge loan” (Bridge Loan., n.d.) and not a “free government handout.” This particular assistance carried with it the responsibility of repayment, an obligation that the GM Corporation has successfully met. This usage was included here because the same negative connotation for the term “bailout” has been connected to this industry as well in recent popular media.