Government efforts to shorten the financial recession

Economy Bailout

Too Big to Fail?: An Analysis of the Current Economic Downturn and the Federal Government's Response

Whether or not it was always recognized as such, the economy of a given society has always been the biggest influence on that society's growth and development. Even in pre-money tribal cultures, the amount of available resources and their distribution dictates the way of life, social stratification, and often governmental power. It is interesting to note that in certain cultures, like the Bushmen of the African plains, there is virtually no political hierarchy, and no sense of ownership. Resources are scarce, and are shared equally among the members of each group of people. As resources grow in abundance, more complex societies and hierarchies arise that develop ways of distributing these resources and wealth, and in the modern age fiscal and political policy are completely intertwined.

Few events in the modern economy have made this more clear than the current recession and the various factors that caused the massive fallout in the financial world. The government's response has consisted of some of the largest spending into the private sector that has ever occurred in this or any other nation; even Roosevelt's New Deal programs enacted during the Great Depression did not provide such large amounts of cash to giant corporations, but instead created programs for the public that provided work and opportunity. Times and situations have certainly changed since then, but not necessarily to the degree that massive bailouts have become the only reasonable means of preventing a total economic collapse. An examination of the bailout efforts quickly reveals their shortcomings.

Bailouts in the Financial Sector

The bulk of the federal government's bailouts went to various entities in the financial sector, including $180 billion to insurance giant AIG, $30 billion to Bear Sterns to allow for the company to be bought by J.P. Morgan Chase, $400 billion total to Fannie Mae and Freddie Mac, $280 billion to Citigroup, and $142.2 billion to Bank of America, which managed to receive government bailout funds while buying up other failing banks and institutions (Nankin et al. 2009). The concept behind these bailouts was that by preventing such massive failures, the damage to the availability of credit could be somewhat mitigated. Except for the essential nationalization of the Freddie Mac and Fannie Mae, however, there has been very little oversight regarding how this money is spent, or how it will benefit the average taxpayer -- to whom the trillion dollars plus truly belongs.

An analysis of bailout programs in general reveals that entities with political connections are far more likely to receive bailout funds and to have fewer strings attached to such money (Faccio et al. 2009). This can certainly be seen playing out here; all major financial institutions in this country have strong political ties, and after the first few failures caught everyone by surprise none have really been allowed to take place. There is certainly a need to protect the credit market, but there is not an abundant amount of evidence suggesting that this has occurred -- the continued financial troubles of many institutions and individuals, in fact, suggests that the bailouts did little more than support massive corporate salaries and shareholder profits.

The bailouts have been called a form of "lemon socialism': taxpayers bear the cost if things go wrong, but stockholders and executives get the benefits if things go right" (Krugman 2009). It is very hard to refute this claim, especially given the current uproar regarding the cost of several proposed healthcare reform bills. In less than a year, the federal government has given over one trillion dollars to large corporations that pay many executives millions of dollars a year despite their failure to run the companies in a proper and sustainable fashion, and in most cases without any form of repayment or any compensation for the taxpayer's money. Meanwhile, discussion of spending less than a trillion dollars over a ten-year period to ensure that these same taxpayers have access to affordable quality healthcare is decried as undue government spending and intervention. In short, taxpayers can be used to support giant corporations and their executives who are cutting pension and healthcare benefits, but one tenth of that amount cannot be used to provide the same healthcare -- and let's not even get started on the Social Security issue (Krugman 2009).

It has been claimed, and reasonably so, that economic decentralization can cause enormous macroeconomic havoc, and that for this reason federally funded bailouts make for sound fiscal policy (Wildasin 2001). This may be so, but it does not preclude the idea of corporate responsibility to the government or the taxpayers that fund it. In fact, such responsibility would be a natural assumption in any privately-funded merger, acquisition, or loan -- whichever construct one would like to apply to the bailout, in the private sector it would necessarily entail either interest payments or control of the company receiving the bailout funds.

The Auto Industry