Why didn’t I get a bailout?
TV studios, pubs, clubs and streets all over the first world are filled with people asking the exact same question. They fault Bush, Paulson and now Obama for their actions in the recent months and claim with certainty that the public is being fleeced to rescue the rich. Talk show hosts and radio personalities stir up the fury and fan the flames of their anger, creating boiling cauldrons of public discontent.
The only answer to their questing seems condescending, especially to the sector of the public that already distrusts authority and seems to have an active dislike of elitism. It is overwhelmingly clear that the majority of the populace do not understand the issues at play, has no comprehension of the consequences of inaction, and would not recognise the correct solution were it gift wrapped and presented on a golden platter.
The irony inherent in the situation is that both the cause and subsequent reaction are examples of the weakness of oversight directed by people whose most pressing concern is making decisions that seem to cater to the stated wishes of their constituents, rather than their best interests.
Our current situation was created by an amalgamation of various circumstances, but many people punt the lack of regulatory oversight as the ultimate cause. The rich and powerful employed many lobbyists who promoted their interests. They funded campaigns. And while everything seemed to be on the up and up, proposing tougher regulations could have gotten you exiled to the political equivalent of Siberia. Furthermore, the political establishment had a vested interest in keeping it easy for Average Joe to buy a house, whether they could afford one or not.
Greed and politics drove the system to ruin and everyone is responsible. Investment bankers and corporations chased profits demanded by shareholders. Being a cautious CEO was almost impossible – a job needed doing and shareholders demanded someone who could do it. It could be you, or it would have been someone else.
The consumer is in many ways more guilty than they realise. Overindulgence aptly describes the behaviour of the man on the street. The average American has an income of about $40,000 a year and has a personal savings rate of zero. The average Chinese earns around $1,500 per year but saves 23% of their income — and is lending a large chunk of these savings, via the People's Bank of China, to the average American. Average Joe has 4 credit cards, with 14% of his compatriots holding more than 10. Main Street bought houses they couldn’t afford, spent more than they received and didn’t save. Now they are paying the price. There is no such thing as a free lunch and excess will extract its revenge.
So who do you blame for the current problem; Joe Public who required credit to buy things they couldn’t afford, bankers and businesses who catered and exploited that need, or the regulators for not foreseeing what was almost unforeseeable? One must also remember than not only executives in New York are responsible, CEO’s with a view of the Thames, Rhone and Seine also overindulged. Whoever is to blame, the result is that businesses, politicians and managers are now being sacrificed on the altar of public opinion. In fact, the recent US election was dominated and decided almost solely by the resolution of the situation. Suddenly all and sundry have an opinion on the crisis and everyone is demanding that their voice be heard.
The recent “bailout” of several financial institutions created a furore seldom seen in a relatively apathetic American Society. Whoever first used the term “bailout” should be hanged, drawn and quartered, because this term, more than any other, has captured the minds of the American public and has been instrumental in forming their opinion.
The “Troubled Assets Relief Program” (TARP), which is the correct term, is where the US government buys distressed assets from financial institutions. Contrary to popular belief it is not a program where assets are handed to the fat cats in business suits or to their companies. The US government is essentially buying severely undervalued assets to try to introduce liquidity into the financial and credit markets. This is exceedingly important because credit is what oils the gears of today’s society. Almost no business, great or small, has the capacity to continue to grow, or even function, without a reliable source of credit.
Farmers cannot plant without borrowing to buy seeds and fertilizer. Car dealers need credit to extend to their clients – most people cannot afford to buy cars with cash. Manufacturers need to borrow before building a new assembly plant. This is why “bailouts” were used to rescue financial institutions. It is not due to cronyism or greed, it is to prevent a systematic loss of confidence in the very system of banking, which would, if it occurred, create a crisis that would dwarf the current situation. Your world would stop turning without credit, whether you realise this or not, and your ignorance of this fact does not make it untrue.
The irony is that at the moment the US Government has a short position on government bonds and a long position on corporate bonds and equities, with the ability to leverage it as much as they want. This is a position that would turn many a hedge fund manager green with envy. If the correct institutions are saved and the correct assets bought, the US could potentially generate quite a substantial profit from the current situation.
There are however valid objections to “bailouts”, especially using public funds. First and foremost is the potential for moral hazard when they are employed. It creates a business atmosphere where corporations and industries can be lax on internal risk controls, because if they fall the government will catch them. This is the antithesis of healthy business practice. Sound corporations should flourish while pedestrian businesses must be allowed to fail. Resources, whether financial or not, must be allowed to flow between sectors and companies for a modern economy to be successful.
There is also the case where bailouts are provided to businesses for political reasons, rather than for legitimate economic concerns. A prime case is the aid provided to the carmakers in the US. General Motors has been a poorly run business for several decades. The poor quality of American cars has become the subject of general international mirth; and yet the political decision makers granted them a temporary lease of life almost solely because it was the politically prudent thing to do.
Like this, political survival often seems to supersede general interest when dealing with this type of emergency. When the crisis first became blindingly obvious and quick and decisive leadership was needed from the US, political infighting and simple mule headedness caused US lawmakers to outvote the first bill – thereby delaying action and creating doubts about the ability and will of America to take leadership in this time. It was only after the bill was reformed to include some earmarks, such as a $2m tax relief for the makers of wooden children’s arrows, that the bill was passed.
The American public is up in arms about the “bailout” of Wall Street without realising they are being bailed out as well. They rant and rave about not being heard, but it is because they do not have a meaningful contribution to make. The question from many is, “Why do we care?” Less than 18 months ago, the decoupling of the world economy was touted to be the white knight that would save it, global growth was assumed to be less dependent on the health of the American market than in the past. But recently we have once again discovered the truth in, “If America sneezes, the rest of the world catches a cold.”
America now has laryngitis and all are suffering as a result. The world requires America to display the political will to make the correct decisions and the wisdom to listen to those most knowledgeable. Brain surgery is not conducted by committee and the economy should not be steered by mob rule or with political survival front of mind
