Corporate bail-outs and their impact on the American economy

Corporate Bail-Out and the current economic situation

Corporate Bail-Outs and the Current Economic Situation

2008 brought about the beginning of an internationalized economic crisis comparable to the Great Depression of 1929-1933. The crisis commenced within the American real estate sector and soon expanded to all American sectors and industries. It eventually impacted all of U.S.'s partners, and gradually, the entire globe. Today, the world is struggling to overcome the recession through various means. In several European countries for instance, the taxes were increased and the expenses of the state apparatus -- such as wages of governmental employees of social funds -- have been decreased, to the massive dissatisfaction of the populations. The approach of the United States officials has been different -- even opposed, one might add. Instead of trying to get economic agents to pay more taxes, the U.S. government offered them bailouts.

A bailout is generically understood a sum of money offered to a company which is in dire need of financial assistance. The recipients of these bailouts were numerous, including all from family firms, to large size corporations, such as Ford Motors Corp. Within Europe, the crisis continues to make victims and to generate internal tensions and this is due to governmental plans which restrict the people's purchasing power and as such threaten to further pressure the economy. Yet, since the United States has developed and implemented a political approach based on financial support for companies, and as such to their employees and the general public, it would be assumed that the American economy has been more able to generate and sustain consumer demand, purchasing power and as such, stimulate economic revival. The aim of this research is that of looking at the governmental bailouts and revealing the extent to which they have been able to positively impact the American economy.

2. Corporate Bail-outs

Corporate bailouts have a long standing tradition within the United States and they were generically offered to large size corporations which were "too big to fail." This "too big to fail" logo, ethos and pathos was used to create nation wide acceptance of the b bailout funds. It meant that these organizations impacted the large economy at a too deep level and that their failure would bring about severe economic damages.

The financial aid offered by the United States government to these corporations varied between actual capital injections, or the co-signing of new loans. Some of the first dated bailouts occurred during the 1970s decade and included a $676 million bailout to the railroad companies in 1970 or a $1.4 billion bailout to aerospace company Lockheed. As the economic crisis took its toll on the American economy and its players, the government created the TARP, or the troubled asset relief program, through which it would offer capital injections to the companies on the verge of collapse. Some examples of bailouts in the commencement of the crisis include:

$29 billion non-recourse loan to Bear Stearns

$100 billion to Fannie Mae

$100 billion to Freddy Mac

$150 billion to the American International Group

$25 billion to the auto industry, mainly Ford Motors Corp, General Motors and Chrysler

$351 billion to CitiGroup (Credit Loan, 2009).

Yet, when some of these companies found themselves in possession of new capitals, their usage of the respective funds was intriguing, to say the least. This situation was most obvious for the Wall Street firms, who used significant parts of their bailout funds to reward their employees with large bonuses. When the problem was addressed with the officials, the arguments on the one side were those of unfairness of such a decision relative to the average people and the fact that bonuses were not part of the bailout plan. The counter-argument was that the funds used to pay premiums and bonuses were in fact retrieved from organizational earnings, not the bailout funds. "If it sounds like accounting mumbo-jumbo, that's because it is" (Haugen, 2010).

In another instance, the entire bailout plan is described as fraudulent for the reason that it is regulated by the Federal Reserve -- an institution which is blamed for sharing in the profits with the economic agents whenever the economy is prosperous, and in times, of economic hardship, passing on the pressures onto the taxpayers. The belief in this instance is that the Federal Reserve should be replaced with a national banking system constructed on real assets. This negative approach of the bailout plans is based on the analysis of the American economy and the adjacent limited sustainability of a consumerist America. "Virtually our entire financial system is based on an illusion. We spend more than we earn, we consume more than we produce, we borrow more than we save, and we cling to the fantasy that this can go on forever" (Haugen, 2010). The bailout is in this sense understood as a propagation of this phenomenon.

From another angle, the bailouts are condemned for having been established in an arbitrary method, without a previous audit and a clear establishment of the real value of the troubled assets. It is also argued that the United States government has taken several hasty decisions in this respect and that their rush was provoked by the Wall Street firms which set out to create panic. Several sound recommendations were by the Public Citizen and Consumer Watchdog, such as an objective analysis of the situation or the capping of the interest rates, but it is yet unclear how these recommendations were implemented (U.S. Newswire, 2010).

4. Conclusions

While the search for alternative sources of energy, the development of the infrastructure and the reduction of the income gap between the rich and the poor are imperatives of the modern society, in times of economic recession, they become secondary goals. And while I hold true the statements according to which some of the TARP money was used to grant excessive premiums and bonuses to Wall Street employees; or those which argue that the funds were not established based on an audit to reveal the true value of the troubled assets, I do believe that the bailouts were pivotal. In other words, while I will agree that the funds were inefficiently or arbitrarily allocated, I do believe that without the bailouts, the American economy would have faced even more severe challenges.

It was virtually impossible for the bailouts to save the economy because the problems were deeper and far more complex. And even today, two years after the first bailouts, the economy is still striving to recuperate. Such problems are not overcome easily, but in time and with sustained efforts. To better understand my standpoint of defending the bailouts, consider what would have happened had the TARP never been implemented. All of the companies would have commenced bankruptcy procedures and the millions of workers they were employing would have been fired. At a first level, the state would have had to offer those former employees social aid. Then, the national purchasing power would have decreased even more, to impact the national demand and the national production. Also, the country's competitive position within the global market would have decreased dramatically. Overall then, while the bailouts may not have been fairly and efficiently allocated and while they did not revive the economy immediately, they did prevent it from taking an even more damaging turn.

References:

Haugen, D., 2010, Bailout Money Should Not Be Used to Pay Executive Bonuses, Detroit: Greenhaven Press

Haugen, D., 2010, the Government Bank Bailout Plan Is a Fraud, Detroit: Greenhaven Press

Haugen, D., 2010, the Government Bank Bailout Will Not Jump Start the American Economy, Detroit: Greenhaven Press

September 2008, Government Bailouts Must Put Americans First, U.S. Newswire

2009, the History of U.S. Government Corporate Bailouts, credit Loan, http://www.creditloan.com/infographics/the-history-of-us-government-corporate-bailouts / last accessed on May 21, 2010