Tag: Bailout

Bailouts Could Hit $24 Trillion?

ABC News reports:

“The total potential federal government support could reach up to $23.7 trillion,” says Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, in a new report obtained Monday by ABC News on the government’s efforts to fix the financial system.

Yes, $23.7 trillion.

“The potential financial commitment the American taxpayers could be responsible for is of a size and scope that isn’t even imaginable,” said Rep. Darrell Issa, R-Calif., ranking member on the House Oversight and Government Reform Committee. “If you spent a million dollars a day going back to the birth of Christ, that wouldn’t even come close to just $1 trillion – $23.7 trillion is a staggering figure.”

Granted, Barofsky is not saying that the government will definitely spend that much money. He is saying that potentially, it could.

At present, the government has about 50 different programs to fight the current recession, including programs to bail out ailing banks and automakers, boost lending and beat back the housing crisis.

We used to complain that George W. Bush had increased spending by ONE TRILLION DOLLARS in seven years. Who could have even imagined new government commitments of $24 trillion in mere months? These promises could make the implosion of Fannie Mae and Freddie Mac look like a lemonade stand closing.

Intervention Begets Intervention, Which Begets…

The logic in Washington is ineluctable.  If government provides money, then it needs to impose regulations.  If the government takes ownership, then it must provide management.

Bail out the banks.  Set bankers’ salaries.  Bail out the insurers.  Decide on corporate bonuses.

And if the government takes over the automakers, then it should run the automakers.  That, of course, means deciding who can be dealers. 

Reports the Washington Post:

Now that the Obama administration has spent billions of dollars on the bailouts of General Motors and Chrysler, Congress is considering making its first major management decision at the automakers.

Under legislation that has rapidly gained support, GM and Chrysler would have to reinstate more than 2,000 dealerships that the companies had slated for closure.

The automakers say the ranks of their dealers must be thinned in order to match the fallen demand for cars. But some of the rejected dealers and their Capitol Hill supporters argue that the process of selecting dealerships for closure was arbitrary and went too far.

Since federal money has been used to sustain the automakers, they say Congress has an obligation to intervene.

At a gathering of dozens of dealers who came to Capitol Hill yesterday to lobby their representatives, House Majority Leader Steny H. Hoyer (D-Md.) and several other congressmen spoke in support of the dealers. More than 240 House members have signed onto the bill, supporters said.

“We are going to stand with them for as long as it takes,” Hoyer told an approving crowd.

What is next?  Congress deciding the prices that should be charged for autos?  The accessories to be offered?  The colors cars should be painted?

I have no idea who should or should not be an auto dealer.  But I do know that it is a decision which should not be made in Washington, D.C.

Turning Tide?

Mark Krikorian of National Review reminds us that Gene Healy had complained about the “Obama Shop” at Washington’s Union Station, featuring lots of “Obama-related tchotchkes and talismans.” Every shop I’ve been into lately – from Macy’s to 7-11 to the airport souvenir shops – has offered Obamastuff. It’s been oppressive.

But I just passed through Dulles Airport, and guess what the America! store on Concourse C was offering? Sure, they had Obama t-shirts, along with the usual White House shot glasses and Washington Monument paperweights. But as you walked past the store, you saw these t-shirts out front:

  • “I Love My Country; It’s the Government I’m Afraid Of” (an oldie but goodie that I first saw a few years ago)
  • “Don’t Blame Me; I Voted for McCain and Palin” (that one might need a bit of editing)
  • “Where’s My Bailout?” (see it here)

The store is probably a leading indicator of what’s selling. So I’ll be keeping an eye on it on my next trip.

Why Promiscuous Bail-Outs Never Was a Good Idea

Jeffrey A. Miron explains in Reason why a government bail-out of most everyone was neither the only option nor the best option:

When people try to pin the blame for the financial crisis on the introduction of derivatives, or the increase in securitization, or the failure of ratings agencies, it’s important to remember that the magnitude of both boom and bust was increased exponentially because of the notion in the back of everyone’s mind that if things went badly, the government would bail us out. And in fact, that is what the federal government has done. But before critiquing this series of interventions, perhaps we should ask what the alternative was. Lots of people talk as if there was no option other than bailing out financial institutions. But you always have a choice. You may not like the other choices, but you always have a choice. We could have, for example, done nothing.

By doing nothing, I mean we could have done nothing new. Existing policies were available, which means bankruptcy or, in the case of banks, Federal Deposit Insurance Corporation receivership. Some sort of orderly, temporary control of a failing institution for the purpose of either selling off the assets and liquidating them, or, preferably, zeroing out the equity holders, giving the creditors a haircut and making them the new equity holders. Similarly, a bankruptcy or receivership proceeding might sell the institution to some player in the private sector willing to own it for some price.

With that method, taxpayer funds are generally unneeded, or at least needed to a much smaller extent than with the bailout approach. In weighing bankruptcy vs. bailouts, it’s useful to look at the problem from three perspectives: in terms of income distribution, long-run efficiency, and short-term efficiency.

From the distributional perspective, the choice is a no-brainer. Bailouts took money from the taxpayers and gave it to banks that willingly, knowingly, and repeatedly took huge amounts of risk, hoping they’d get bailed out by everyone else. It clearly was an unfair transfer of funds. Under bankruptcy, on the other hand, the people who take most or even all of the loss are the equity holders and creditors of these institutions. This is appropriate, because these are the stakeholders who win on the upside when there’s money to be made. Distributionally, we clearly did the wrong thing.

It’s too late to reverse history.  But it would help if Washington politicians stopped plotting new bail-outs.  At this stage, most every American could argue that they are entitled to a bail-out because most every other American has already received one.

Strike a Blow for Freedom: Don’t Buy GM

Time and again my colleagues and I have warned that the government’s takeover of GM would divorce business decisions from economics and wed them to politics ‘til death do they part. But I won’t gloat. Better to be right and satisfied that government is reasonably restrained than right and house hunting in Galt’s Gulch.

We’ve already seen the president insist on the firing of a CEO, design and negotiate a bankruptcy plan devoid of much economic merit, impose preferences about which models to produce, and assure the diabolical, undeserving management of the UAW that GM won’t import small cars from its foreign plants to make space for its U.S.-produced budget-busting green vessels.

Now Congress is attempting to legislate its way into the boardroom. Last month, GM/Obama announced plans to terminate 1,300 dealerships, as part of a larger effort to reduce costs and, ultimately, turn a “profit.” (The term “profit” is, shall we say, imprecise in this case given the amount of production subsidization, fuel taxation, and tax code inducements that will be necessary to sustain GM for the foreseeable future). But many in Congress don’t like the idea. As reported in the Detroit Free Press:

By a unanimous vote, a U.S. House committee has approved a measure that would restore 2,100 dealers either cut or scheduled to be closed by General Motors Corp. and Chrysler Group LLC.

…The bill would turn back the clock to before the companies filed for bankruptcy, restoring the 789 dealers cut by Chrysler and 1,300 dealers GM chose to wind down.

…Executives from GM and Chrysler have both told Congress that cutting dealers was essential to their survival outside of bankruptcy, saving each company billions of dollars a year and strengthen their remaining sales force.

“This legislation, if passed, would put our long-term viability at risk,” said GM spokesman Greg Martin.

I suppose you can’t really blame Congress for trying to impose its wishes on GM. After all, the Constitution is silent on the matter of which branch of government furnishes the CEO of nationalized companies.

But in all seriousness, this legislative effort is an affront to common sense and an insult to our heritage of free enterprise and capitalism. It is stunning enough to watch the slow-motion nationalization of an iconic behemoth like GM, but Congressional meddling at the operational level to stop the company from following through on an obviously wise cost-cutting measures should be a wake up call to all Americans that we are doomed to politically-driven micromanagement of the economy–into the ground no less–unless we register our disgust and dissent now!

What makes these actions evil, and not just stupid, is that Congress really does not care about whether GM is profitable or not. The Henry Waxmans of the Hill only care that GM produces green vehicles, regardless of their exorbitant costs of production and scant consumer demand. And the John Dingells (among whom are included the 200 sponsors of the bill to restore the dealerships) only want GM to provide jobs, regardless of the fact that GM needs to scale back its labor force substantially to even approach the realm of commercial viability. In other words, Congress demands that Americans subsidize GM because GM’s short-term viability is good for their political fortunes.

Enough. Show Congress that you won’t comply and that you won’t be pawns. Boycott GM. Boycott GM until the government relinquishes its grip on the company’s decision making process.

Too Big to Fail

One of the most pernicious public policies aggravating the financial crisis is that of “too big to fail.” The doctrine states that some banks (now financial institutions generally) are so large that their failure would incur “systemic risk” for the financial system. That sounds terrible and it is intended to. Financial services regulators and Treasury secretaries use it to frighten small children and congressmen. How can an elected official vote to incur systemic risk? He must vote to approve the bank bailout of the day. In fact, people who use the term cannot even agree among themselves as to what it means, much less what causes it and, therefore, what the appropriate response would be. I suggest the reader substitute the phrase “too politically connected to fail” whenever he sees “too big to fail.” What follows will then be rendered intelligible.

Banks, Bailouts, and Political Pressure

The Washington Post reports:

Sen. Daniel K. Inouye’s staff contacted federal regulators last fall to ask about the bailout application of an ailing Hawaii bank that he had helped to establish and where he has invested the bulk of his personal wealth.

The bank, Central Pacific Financial, was an unlikely candidate for a program designed by the Treasury Department to bolster healthy banks. The firm’s losses were depleting its capital reserves. Its primary regulator, the Federal Deposit Insurance Corp., already had decided that it didn’t meet the criteria for receiving a favorable recommendation and had forwarded the application to a council that reviewed marginal cases, according to agency documents.

Two weeks after the inquiry from Inouye’s office, Central Pacific announced that the Treasury would inject $135 million.

As we’ve said here many times, going back to 1983, when government is in the business of making economic decisions, you inevitably get more lobbying, more campaign spending, and more political influence on economic decision-makers.