Saturday, November 15, 2008

I Have A Problem With Government Bailouts

I have a BIG problem with the proposed bailout packages being put together in Congress. I understand why this huge cash infusion is desired, I understand it's a huge political nightmare for those in power to not do anything about the economy, and I'm willing to go along with dumping money into the economy (though begrudgingly). I don't, however, think it's a good idea for the government to borrow (or just print more) money to do it. Isn't that how we got into the mess in the first place?

My main complaint is: the Federal Government has no business buying ownership stakes in individual businesses. I believe this is an unconstitutional power creep into the affairs of private businesses. (I use the term private as a general description of businesses which don't belong to the government whether they are public or private companies or corporations.)

I, again begrudgingly, went along with the idea of the Federal Government buying up bad debt from banks and other lending institutions. I don't think it is within the purview of government to own land, except that land on which government installations are built on. Buying mortgages or property would at least have an "end game" to it. Once the economy starts growing again, the government could easily sell any unpaid securities back to private companies and sell any property it gained and use the profits to pay off some of the national debt. 

What happens, though, when the government starts buying pieces of private companies? Where's the end game in that? To be sure, we may hear things like "It's only temporary" or "Once things are going OK we'll sell the stocks back to the public," etc. But I don't think it's going to be that simple. Government programs, once started, have a nasty habit of never going away.

Why do I see this as a bad idea? Here's why:

First - where is this stock going to come from? Shares of stocks already out in the public market have already benefited the companies which issued them. They issued the shares, those shares were purchased, and the companies have already received what they were going to get. If the government comes in and start buying those shares already on the market, the price per share may go up, but the issuing companies really don't get any benefit from that action. And, if the government decides to divest itself of the shares, the prices will drop from the sudden availability of those shares.

As I see it, in order for the government to actually infuse money into companies, those companies will have to issue new shares for purchase. This will put money into the companies, but would dilute the shares already outstanding and thus possibly cause another drop in the markets. That certainly won't help those who already own shares. If the companies issue new shares and then purchase those shares directly back, the possible negative impact on the outstanding shares might be lessened. Still, the stock markets are strange entities and tend to fluctuate for no reason at all and just the action of issuing new shares might make the outstanding shares lose their value.

Second - When the government owns shares of stock, how much influence will it have over the running of those companies of which they hold shares? I've already heard more than once that the government should have a say in how the companies are run to make sure their (our) money isn't wasted. Of course, the government knows just how to not waste money, don't they? Really though, the government already wields a lot of influence over companies through regulations and taxes. How much more influence will they want? I see this as a major problem with any stock buying scheme. It's tantamount to nationalizing a large sector of the economy, and that is never a good thing. 

I think we need to be very wary of any bailout which involves government ownership of private companies. Ronald Reagan put it best when he said, "The nine most terrifying words in the English language are: 'I'm from the government and I'm here to help.'" I've written before in this space and I reiterate here: The more freedoms we yield to the Federal Government, the more we head towards having no freedoms at all. If we go along with this plan, I can almost guarantee there will be a new government bureaucracy out there which will be set up to manage "our" stock portfolio before the end of Obama's first term.

So, you may be thinking to yourself, "What ideas do you have to fix things?" I'm glad you asked, because there is an example from history which might show a far better solution.

Back in the late 70s and early 80s, the economy was in a bad way. As I recall, things then were far worse than they are now. Living in the Detroit area in those days, I remember things being especially tough for the auto industry. Like today, they were making the wrong cars at the wrong time and, unlike today, the quality of those cars was very, very bad.

All of the "Big 3" were having financial problems caused by losing sales to imports and because the economy was bad overall. However, Chrysler was, by far, the worst off. Like today, they were on the verge of collapse, and that collapse would have put many more thousands out of work. Prospects were rather bleak, to say the least.

Then, along came Lee Iacocca. He was a business genius and knew the auto industry inside and out. He had a plan to revive Chrysler, but in order to put it into action he needed cash. Instead of going to the government for a hand out, he asked for a hand up. He got leaders in the Congress to go along with loan guarantees so Chrysler could borrow money again. This turned out to be a great move for everyone concerned.

Iacocca was able to revive Chrysler very quickly, and managed to pay off all the loans he made based on those government guarantees within a few short years. Not only did he get Chrysler back on its feet and moving in the right direction, he also purchased the languishing American Motors Company and helped keep its Jeep division alive under the Chrysler name. This is truly a fantastic success story, and one I think bears scrutiny today.

Now, there may not be any more people with the business acumen of Lee Iacocca. Perhaps he was one-of-a-kind. But, certainly there are some folks out there smart enough to pull off a similar feat. I am certain of one thing: those people are most likely not going to come from the Federal Government. To quote Reagan again: "The best minds are not in government. If any were, business would hire them away."

Although loan guarantees are, in my opinion, unconstitutional as well, they do have a couple of advantages over stock purchase programs. One, they don't involve the government throwing huge wads of cash everywhere. Loans help keep the cost to all of us down. Two, they keep the private sector private.

There are those who say there is no money to lend. I disagree. There may not be a lot of money in Citi, AIG, and others who are now hurting because they got greedy and speculated in bad loans. But, there are many more banks and lenders who didn't get greedy and kept themselves out of the current mess. They might not have billions to loan individually, but when smaller loans are combined together they can be enough. This way, the risk is also spread out across many companies which will minimize further risk to the financial sector.

There are other solutions to our problems other than running to Big Daddy for cash. There are other alternatives to ease the current financial problems which don't involve us giving our hard-earned cash and hard-won freedoms. I think we need to consider those before we just let our leaders throw a lot of our money away.


  1. In the case of the auto-makers' bailout, it's a relief to have a national issue that is so straightforward: American cars tend to break down and fall apart therefore people are not buying them. If GM and Ford don't want to go out of business, they should start making decent cars. To bail them out would be to reward their terrible manufacturing standards.

  2. Thanks for your reply, Media Boy.

    I'm not sure if I agree American auto quality is that cut and dry anymore. What makes up an "American" car is really a bunch of parts made all over the world, imported and assembled somewhere in the US. For example, my last new vehicle was a 1990 Ford Ranger of which: the engine was from Germany, the transmission was from Canada, much of the electronics were from Japan, Korea and China, and other parts were from Mexico. It was really more of an international car and I'm sure the newer ones are even more so.

    That Ranger had around 125,000 miles on it when I traded it for another vehicle, and is still running its new owner around town. It never gave me any serious trouble.

    I now drive a 1997 Jeep with over 160,000 miles on it. The A/C gives me trouble and I had to have part f the front end rebuilt recently - but it runs like a top, doesn't burn any oil and best of all it's paid for.

    I will agree there are certain models of "Big 3" vehicles which ended up being lemons. I think sometimes new models are rushed to market because the "Big 3" are usually reacting on the back end of trends instead of anticipating them and responding. On the whole, though, US-built vehicles are, by far, better than they used to be.

    I will also agree, in principle, with your summation that the "Big 3" need to change their ways. I don't think we need to reward them for making bad decisions.

    It's not just the management of those companies which is to blame. A comprehensive solution needs to be worked out with labor unions, suppliers, stock holders and company management. Otherwise even a bailout won't work.