Government Bank Bailouts of Private Industry - Research Paper Example

Government Bank bailouts of Private Industry Introduction Bank bailouts is the act of giving a loan or capital to an entity like a company, individual or a country that is in a danger of bankruptcy, insolvency or total liquidation. It can also mean helping a falling entity to stop spreading it effects to all the sectors of the economy since this can have adverse effects. The bank bailout costs can be used to rescue the firm’s assets. Often, it is the government that funds the bank bailouts, through the loans advanced to the firms, so that the companies pay back the earlier debts, which they borrowed from other organizations (Cannadine 3). Therefore, this paper focuses on whether bank bailouts are good or bad to the economy. Focusing on the U.S government history of bank bailout, the Penn Central Railroad bank bailout in 1970 incurred $3.2 billion, while in 2008 the Trouble Asset Release Programme (TARP) emergency economic stabilization act made the government use $700 billion to bank bailout the banking sector from the mortgage crisis. Precisely, “the bank bailouts were adopted as a way to save the economy from collapsing” (Tully 2). The 2008 $700 billion Banks Bank bailout Analyzing the 2008 Trouble Asset Release Programme (TARP) emergency economic stabilization act, “which saw $700 billion pumped to bank bailout the banking sector from the mortgage crisis was wrong ” (Rudebusch 272). The business owners had made a wrong choice in investing in the mortgages because they did not plan strategically for the future returns on their investment. Therefore, this implies that there is a high possibility of them failing to plan again, and the government stands a chance of losing the taxpayers’ money that it had invested in the business with expectation of getting good returns on interest (Graham 14). Clearly, the liquefied bank risks the bank bailout rescue plan; unless strong strategy plans and amendments are put in the business, which might not fail again. The executives of the banks are also the members of the treasury, and they stand to gain from the bank bailout. Possibly, it is their wrong decision that led to the company’s failure. In fact, the executive members and top management were meant to be punished instead of getting the rewards from the government. These are the same people who are the members of the treasury and the economic policy makers of the government. In fact, by bailing out the banking sector, the executive members reward themselves at the expense of tax payers. The government’s involvement in the bank bailout raises some disagreements on the prevailing free market economy systems that currently exist. Other stakeholders in the market raise issues why some sectors of economy are bailed out, while others are not. They see this as unfair practice because when they have financial downtime, they face it alone without any financial assistance from the government. Often, they find it hard to compete and survive in such an economic system. Like the national reserve, the government created a high liquidity with a financial policy plan that encourages people to access mortgages, which they could not initially afford. This has led to the “fall of Fannie Mae and Freddie Mac, which have negatively affected the economy” (Rudebusch 246). The Federal Reserve Bank spent a lot of money, about $1.1 trillion on the financial institutions in exchange for the paper securities to inject into the banking system. And, the $700 billion Trouble Asset Release Programme (TARP) was added to the funds already circulated in the economy, five months before the Trouble Asset Release Programme (TARP). The $700 billion would be used on the paper worthless organizations with no possibility of good returns on the tax payers’ money. If the bank were to make money from the floated papers on the mortgage security, there would be no need for the government bank bailout; instead other enterprising institutions could have purchased those papers. But, it seems from their projection and analysis that this financial plan was likely to fail. In a market economy, it is a tough competition and others have to win, while other stakeholders lose. If the banks, which were ineffective, inattentive and negligent in their decision making are rewarded by the government bank bailout program, this sends a wrong signal to other banks, which were prudent in their decision making and had put in place good strategies to enable them survive in the competitive economy. Arguably, these well run banks ought to be stronger and more profitable than the ineffective and poorly managed ones. When banks do not lend their own money, but only advance the depositors’ funds, these institutions may go under. In such a case, the depositors tend to move their funds to some safer financial institutions. For example, when Merill Lynch was subsumed by the Bank of America there was no big problem since the resources were efficiently moved, marketed and the tax payers did not have to bear the burden of bank bailout. Similarly, when Mutual Washington collapsed, they opened the next day as part of JP Morgan. Not even one depositor lost money, not a customer lost his or her line of card and not a taxpayer’s dollar was required for this financial relocation plan. Looking at the case we had in 2008, “there was the possibility of a complete crash of financial credit, leave alone the burden the tax payers had to bear “(Thomton 46). Other than being unnecessarily expensive, the bank bailout money was used to keep the business partners afloat. But, this could have been the prime time to allow the market place to sweep out the poor investment firms and the negligent banking facilities to allow the rest to enjoy the prosperity gained on investing in secure knowledge that the best and brightest banks had adopted in carrying out their financial activity, and this could make them survive the competition. The sale of WaMU broke the rule of one-failure only; the increasing risk effects by the Wall Street firms still continue growing. This is something they have been accustomed to, the only time they avoided the risk was after great depression when firms went insolvent. But, the rest of the actions clearly show that their risk-seeking would come in full force and push them to the next financial crisis. The bank bailout makes the big financial institutions lazier than their competitors. These weak financial institutions are the like pets to the government. Therefore, the government has always felt the effect of the economic depression since these firms have never taken sound strategies to prevent the financial crisis. The bank bailout program made the United States annual deficit on the budget for fiscal year 2009 exceeds $1 trillion. The proposal of Paulson, the Federal Treasury governor would lift the debt of the United States Federal ceiling by $700 billion, that is, “from $10.6 trillion to $11.3 trillion, but this could not be realized “(Rudebusch 268). “The $700 billion would stop the problems facing the financial institutions, and the piecemeal approach could have great cost impact later,” (Shanon 1). The total fund to rescue the toxic-mortgage fallout has been approximated to be more than $2 trillion; this includes the payment-adjustment problems, which were to come in 2009 and 2010 (Tully 2). Looking at the collapse of Washington Mutual that failed largely due to imprudent ARM loans, is a clear example how a government action can assist in preventing a tax-costly crisis. If for example, the ARM-loan crisis can be solved at zero cost to the taxpayers, then others can be potentially solved at a lesser cost, if rescued right now before it goes out of hand. Deploying the bank bailout package now should make for similar pre-emptive costs, which can be spent in future and even lead to a global economic crisis. Conclusion The 2008 bank bailout was the most expensive financial program that has been witnessed in the American history. The last ten years give no assurance that the financial-services sector will be stable in future, and we expect a cycle of bank bailouts. Even though, the Wall Street and the banking industry had a very tough financial crisis, people should lose hope that people because government owes them the absolute right to bank bailout the economy from the financial crisis. Therefore, the government should implement viable policies to facilitate the economic growth. When the government does this, the citizens will have enough money for consumption, savings and investments. In fact, this is only possible when the per capita income increases. Thus, the individual’s disposable income grows proportionately according to the per capita income. The bank bailout was spearheaded by the ‘public-spirited' ex-Wall Streeters, and this makes it appear to be merely nepotism of some kind since the former friends of the Secretary of the Federal Treasury Paulson, whom he had worked with in the civil service stand to gain more than the disinterested persons from the other walks of life. Importantly, the low income individuals stand to gain from the bank bailout since they would be able to afford the mortgages, which were initially very expensive for them to afford. In fact, the bank bailouts are bad since it maintains the bad executives who make bad financial decisions in management. The actions of such bad executives waste the taxpayers’ money on companies, which do not have real future. Consequently, the bank bailout decreases equality of opportunity since good entrepreneurs are denied the ability to create a profitable enterprise from the assets of a business that is not profitable. Such entrepreneurs are denied the chance to take up the assets of the failing firm in order to create excellent and competitive products that can fetch good market prices. Arguably, a bank bailout simply maintains a status quo of financial mismanagement, poor planning and bad decision making, which lead to failure. Since a bank bailout interferes with the equality of opportunity, especially when the best and competing entrepreneurs are prevented from creating some of the best enterprises and products, companies that are failing should be allowed to go into bankruptcy. The profitable assets of such companies should be bought by the well-managed firms, but the money-losing branches should be allowed to collapse. Therefore, the bank bailouts did more harm than good to the economy. Works Cited Cannadine, David. Mellon: An American Life. New York: Alfred A. Knopf, 2006. Print. Graham, Benjamin and Dodd, David, L. Security Analysis. New York, NY: McGraw-Hill Book Co. Inc. 2001. Print. Rudebusch, Glenn. “Federal Reserve Interest Rate Targeting, Rational Expectations, and the Term Structure,” Journal of Monetary Economics 35.2 (1995):245-74. Print. Shanon, Miller. Government Bank bailouts: Good or Bad for America? Articlesbase. Articlesbase. Com, 30 Nov. 2008. Web. 17 Nov. 2011. Thornton, Daniel. "When Did the FOMC Begin Targeting the Federal Funds Rate? What the Verbatim Transcripts Tell Us." Journal of Money, Credit, and Banking, December 38 (2006):39-71. Print. Tully, Nolan. Why the Bank bailout is Wrong. Nolan Chart. Nolanchart.com, 2 Oct. 2008. Web. 16 Nov.2011. Read More