U.S. Government Bailouts - Essay Example

U.S Government Bailouts Introduction Government bailout is a maritime colloquial used in the financial sectors in reference to the process in which the government provides financial assistance to leading corporations thereby preventing them from falling or facing an imminent collapse. The economy survives on a number of sectors, which face different challenges; however, the government considers some industries too important to fail and therefore provides financial incentives to keep such companies operational. The transport industry, for example, is the American economic backbone. The industry sustains trade and the travel of people throughout the fifty-two states. The country therefore requires an efficient and elaborate transport industry that does not face any serious financial challenges, which may weaken its operations (Muolo 41). To ensure this, the government provides tax reliefs and financial incentives to bigger corporations in the transport industry, which include oil companies, airlines among other stakeholders in the industry. The bailout is a maritime term inferring to the process of removing water from a sinking ship using smaller buckets. The term is used in the financial sectors therefor to refer to the nature in which the government gives financial aid to its major corporations during difficult financial times. Bailouts are often formulated and implemented through acts of parliament; the lawmakers discuss the economic situation and therefore determines the appropriate amount of money capable of ensuring that a corporation stays operational despite the financial challenges at the time. The government gives out the money in a form of a loan, which the company pays later after it stabilizes its operations. Additionally, the government gives out the bailouts in the form of grants or through the purchase of shares of a poorly performing corporation. The different methods of providing the bailout depends on the nature of the financial crisis and the size and importance of the corporation among others. Bailouts have consequences; the government draws its funding from the taxpayers. This implies that the government uses the taxpayers’ money in salvaging poorly managed corporations since every organization should have an effective emergency management strategy, which ensures it never becomes bankrupt. Bankruptcy is often a result of poor management of the public corporation, ineffective market surveys and projections. The use of the government money in bailing out such companies have serious economic consequences since he government operates on a tight budget annually. It therefore compels the government to replace certain economic activities to save the money for bailing out such failing companies. The redirection of the government money therefore results in inadequate management of certain government ministries, which had to reduce their spending (Shaanan 31). Additionally, the government may try to raise the money within a short period by increasing the rate of taxation. This results in the increase of price of some of the most essential commodities such as fuel at the expense of the citizens. The United States of America has often used bailouts as an effective method of revamping the economy thereby maintaining its position as the strongest economy in the world. In the last century alone, the country has faced five major financial crises, which prompted the initiation of expansive bailout plans to some of the leading corporations in the country. The five financial crises include the Great Depression, which affected the entire world following the end of the First World War. During this period, countries shied away from one another thereby paralyzing international trade. Additionally, the intense conflict that lasted years prevented any major economic activity such as agriculture and countries that had relied on agriculture but served as battlegrounds such as the Japan, Italy and Germany faced the worst. The slow economic activities slowed down the rate of economic development in several countries including the United States of America. In order to keep some of its leading industries operational, the government bailed out major corporations in several industries at a cost of more than seven hundred billion dollars. Another great bailout plan occurred in the 1989 when the government bailed out leading financial institutions in the country. In an attempt of increasing financial activity in the market, banks had opted to give out loans to their customers. Unfortunately, the period faced one of the worst recessions resulting in major financial losses for the banks. It compelled the government to bailout the leading financial institutions to prevent a major global financial crisis. The government provides the bailout by purchasing the banks' non-performing stocks such as mortgages, collage loans and auto loans among others. The bailout provided enough money to keep the organizations operating despite the precarious markets. The Bear Stearns corporation bailout plan of 1923 is another iconic event in the American financial market in the last century. The giant investment bank survived the great depression and the subsequent stock market crash to stay operational. However, the 1923 subprime mortgage disaster compelled the company with billions of dollars’ worth of investment to face an imminent collapse. The collapse of such an institution would have resulted in a major financial crisis that could have resulted in recessions and global dollar crises. The government therefore formulated and ratified a twenty nine billion dollar bailout plan to keep the company operational. The bailout thereafter sustained the company making it perform some of its most pertinent operational functions therefore staying operational. The government in 2008 spent two hundred billion dollars to bail out yet some other two-mortgage moguls the Fannie Mae and the Freddie Mac corporations. The two companies had suffered great financial losses in the past financial crises such as the great depression and the subprime mortgage disaster responsible for the near collapse of Bear Stearns. The federal government took control of the companies despite being private institutions thereby providing each with a hundred billion dollar loans. The trend in the financial bailouts in the country reveal some of the economic sectors that the government considers important. The housing sector is of great importance in realizing the American dream. As a developed country and the strongest economy in the universe, the country commits to provide effective yet affordable housing for its population. This therefore makes the housing sector one of the most important sectors in the American economy providing jobs to millions of people (Shaanan 12). To effect an effective housing plan, the government encourages the provision of mortgages to its citizens at cost effective prices. The government provides incentives to the different mortgage companies thereby encouraging more people to acquire the effective payment plans for affordable housing. Mortgages are a mechanism in which the public access funding from banks and other financial institutions to either buy or build houses. The banks and the financial institutions provide adequate payment for the projects and commits their clients to an agreed form of payment either annually or monthly. The banks and the financial institutions therefore make a substantial amount of profits capable of maintaining the operations. This effective process of owning houses has resulted in a lucrative financial industry as major financial institutions list their products in the country’s stock market and other financial market. The real estate industry is currently rife in the United States of America implying both a growing population and a growing economy. However, the operations of the financial industry are precarious since every day the prevailing trends in the market influence both the value of the currency and therefore the prices of the shares and other related products. Additionally such occurrences as recession and dollar crises affect the rate at which the people take up such policies or repay their commitments. Recessions result in massive job loses while the dollar and other currency crises result in a slow business as prices of some of the most important product such as oil rise thereby resulting in recessions thereby continuing the vicious cycle of the financial crises. This implies that it is very easy for financial corporations to make serious loses within days. The operations of financial institutions therefore require effective management. However, the market relies on future projections to determine its operations and activities. The unpredictable nature of the future makes it difficult for the businesses to make any concrete financial projections and often incur losses when such unpredictable calamities as hurricane and man-made events as wars occur. The fifth major financial bailout was in 20008 when the government took over the operations of the American International Group. The American International Group is one of the leading insurance companies in the world. From late 2007, the company began facing serious financial challenges owing to the volatile insurance industry. Unfortunately, private lenders decline to give the company any financial assistance and the company was therefore at the brink of bankruptcy, the collapse of the AIG could have affected several other companies in the market and result in a possible crisis in the insurance industry (Stiglitz 23). The government therefore rolled out an 85 billion dollar bailout plan that kept the company operational during the tumultuous times. Several companies face bankruptcy and even cease operating but the government shows no concern, this implies that the government makes an effective assessment of the companies through a detailed analysis of the company profiles and the effects of the collapse of such companies. It is evident that government provides bailout plans even for private institutions. The government does this after considering the effects of the collapse of such organizations. In all the private institutions, that the government has provided bailouts to in the past century belonged in very vital economic sectors some of which safeguarded the future of the country and the therefore achieving the famous American dream. The AIG for example provides more than one million Americans and offers effective insurance services to more than one hundred million Americans. Its collapse for example could have resulted in serious job losses that could have overwhelmed the government. Additionally, the resultant financial crisis felt by more than a hundred million people within a single economy could have possibly resulted in an internal recession (Harris 22). The government therefore acts in a precautionary manner to prevent the occurrence of a major economic disaster whose effects could have been costlier than the eighty five billion dollars the government used in the bailout plan. From the several bailout plans throughout the history of the united States of America, a number of patterns are evident most of which sustain the economy through the tumultuous financial times. One is that the government provides the money to sustain the liquidity in the economy in instances where banks and other financial institutions do not will to give the assistance. In such cases, the economy faces an acute shortage of cash and the continued withdrawal of currency by the concerned stakeholder simply worsen the situation making the operations of the corporations that fall victim to such disasters impossible. Additionally, the government assess the conditions of the financial institutions it provides to the bailout plans. The most common bailout plans is the purchase of stock, this implies that after the company stabilizes later in the course of its operations, the government becomes one of the major shareholders and therefore entitled to dividends. This therefore implies that the bailout plans are not entirely negative since they provide an additional source of revenue for the government thereby strengthening the economy. The government implements its bailout plans in an effective and seamless manner, which includes the creation of a secondary entity that audits the operation of the firm and supervise the implementation of the bailout plan. The entity therefore becomes the new interim management to provide guidance on the financial activities of the organization until it grows past the crisis after which the entity loses its mandate and the government becomes entitled to dividend. The government may later sell its stocks in the finical markets after the company’s stocks regains value thereby making additional revenue besides the annual dividends. However, in the provision of the bailout plans, the government should formulate a manner in which the taxpayer who bears the costs of such expensive operations gains some interests. One such way is by ensuring that tax payers’ money is not used poorly but only in the process of strengthening the banks thereby safeguarding the value of the currency. Using such funds to pay dividends to investors inadvisable and does not improve the state of the economy (Stiglitz 09). However, bailouts present a number of disadvantages most of which also affect the economy negatively. Bailouts make the big companies desensitize their operational risks thereby spreading such risks to other smaller companies most of which had effectively managed their risks thereby surviving the financial crises. This spreads the risk across the market by deliberately favoring poorly managed larger corporations. This implies that the government shows more concerns to the few large corporations, which often develop monopolistic business tactics at the expense of other smaller companies, which sustain the economy. Additionally, the provision of safety nets to the larger corporations create moral hazards thus stifling both the growth of smaller companies and the economy in general. Small companies require an enabling environment and they often benefit from the collapse of the larger monopolistic companies (Harris 21). Additionally, the creation of an entity to manage the corporations permit the creation of bureaucracies, which make the management of such companies more difficult. This often results in reduced rate of financial activities for the companies as they implement the bailout plan. Works cited Joseph, Harris. Rewriting: How to do things with texts. Logan, Utah: Utah state university press, 2006. Print. Joseph, Shaanan. Economic Freedom and the American dream. New York: Palgrave Macmillan, 2010. Print. Joseph, Stiglitz. Free-fall: America, Free market and the sinking of the world economy. New York: W.W Norton and company, 2010. Print. Muolo, Paul. $700 Billion Bailout. New York: John Wiley and Sons, 2011. Print. Read More