New Age History and Economics

The Day We See The Truth And Cease To Speak it, Is The Day We Begin To Die. MLK Jr.

Wednesday, June 1, 2011

how govt justifies spending good money over bad?

                     THE FREEMEN
Dear Brethren,
What are bailouts?
A company is in trouble and tanking or going down including banks. Government gives them money so that they remain in business? Isn't that the risk of free enterprise? Why support loss making units.  Why spend good money over bad enterprise. Why promote corruption and nepotism ?
1. Sometimes a company is too big to let fail as a matter of national policy. If it is allowed to fail, it might bring down with it, key pieces of the money market, which would result in automated run on money. So the government can either directly shore up the money market, for which it would have to create the legal authority, or it can buy common stock from a company treasury, or it can give a loan on terms, usually including audit and inspection rules that give a company's management all the attention it never wanted. The economic crisis is a man-made and not a natural disaster.  - Dave B
2. Economically it is NOT a good idea. Politically it often is. It is another way to buy votes with money. That's why they get bailouts. Absent those bailouts the businesses would simply fail and others would buy the assets out of bankruptcy.
3. Governments have to step in to keep the economy working. From what we call a Macro-Economic perspective which basically means the BIG PICTURE: The economy runs on MONEY, everything, from you and me buying kit kat to multi-billion dollar business deals to funding US bases overseas etc. And if all these activities STOP from a lack of money/liquidity/confidence in the economy, we have disaster/depression whatever you want to call it, and this is portrayed as a FREAKY thing and it probably is.
       Some companies are too big to let fail. Yes, PLUS the American bailouts were of a few LARGE companies not just one. And especially if those companies are linked to debt insurance - where like you and me who buy accidental insurance, firms can buy debt insurance just in case they go bankrupt and they get money since it is like a big insurance policy for us if we get sick. And because firms are SO interconnected in the economy, one firm going bust can lead to insurance firms going bust, and if they cannot insure other firms (people, houses, other firms), the entire shooting match stops. Unlike a car-accident, where perhaps at least only 2 people are involved… a firm going bankrupt and dragging insurance companies down with them can affect the entire economy; thousands of workers, offices, buildings etc. This is why the government has to step in to keep the economy running. NOW whether the government could have done things better is another story (I say thing because apparently the bulk of bail-out funds did not get to those who really needed it).
        Special interests also have a part to play, in but I believe the “campaign contributions” gets bank owners an audience with government officials so they can scare them into APPROVING the bail-outs. Because if a government allows firms to fail, it would lead to all the crisis I just mentioned above… and this would be very politically incorrect, the next Presidential candidate would say: “Don’t vote for that party because that economic crisis happened on their watch.” Hence a government would want to keep things working (maintaining status quo) as much as possible. Then there is the foreign buy-out concern; Chinese people buying cheap American assets… that is a political and cultural-nationalist no no.
     I also agree that it not good to spend good money over bad for long. There are moral issues behind bailouts. Yes governments should not be obligated to the lenders and allow free enterprise have a free play, dead or chronically sick units should not survive and take away scant resources of a nation.
      The bail-outs were done without much regulation or supervision, this is why the BULK of funds went into the pockets of wealthy business owners and corporate executives.  – Politically or correct economist. 

        Very little of this money actually comes from taxes. Almost all of it is newly created by book entry. When this new money enters the banks, it immediately moves out again into the economy where it mingles with and dilutes the value of the money already there. The result the appearance of rising prices but which, in reality, is a lowering the purchase value of currency.
        The public have no idea that they are footing the bill of bailouts. They know that someone has stolen their hard earned money but think that it is greedy businessman who raised prices or selfish laborer who wants higher wages or unworthy farmer who demands too mush for his crop.

Kapel De

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