Interesting. Ben Bernanke will soon be contacting David Gibson personally to see if David and his family want to increase their insurance coverage.
I wish this sort of thing hadn’t happened over and over again in recent decades. An isolated instance would be one thing, but you’d almost think government had become corrupted by big business.
I’m old enough to remember when people thought that $85 billion was a lot of money.
Don’t know much about economics, I read the arts page and the comics …
All these news stories offer is a lot of bad noise about mismanagement, worldwide ripple effects and market panics. Here’s what I’d like to know:
1. Do these bailouts work? How many government bailout loans (besides Chrysler) get paid and full and with interest? The bailouts usually involve some type of government oversight of the business or the duration of the loan. What does this entail and how much does it cost? Is the cost of that on TOP of the bailout or rolled into the package?
2. Doesn’t a bailout make all of us investors these companies? I don’t know if I got all the zeros right in my calculation, but $85 billion divided by 300 million Americans = about $28,000 for every U.S. citizen. When can I expect to see a dividend check from this investment? Soon, I hope, because my health care insurance co-pay when up $50 a month this year.
3. How much collateral can the companies asking for bailout offer the taxpayers to help secure the loan? Less that collateral, how much of our $28,000 per head do we stand to lose if the bailout fails?
4. Are there alternatives to a bailout? When Wild Bill’s Bedding and Mattress went belly up here, he liquidated his inventory, sold his building to Curves and squared up with his silent partners. AIG looks to have a pretty nice building, lots of office furniture and equipment, and probably has some assets it could liquidate. Why do they get a different deal than Wild Bill? Oh, right, because these companies are SO rich that if one of them goes down, the whole economy collapses.
5. Should we, as taxpayers, allow a corporation to accumulate so much wealth that if they go belly up, they can blackmail us for bailouts with threats of market panic? That would mean capping wealth, which I realize is against Mom, Apple Pie and the Free Market, but, then, so is an unsecured $85 billion bailout loan.
6. Stay tuned! The auto companies here looking for something like $50 billion in handouts to retool their auto plants and make more energy efficient cars that run on electricity. I’d say the time for them to have done that was during the Carter administration. Although I’m willing to shuck out the money IF they’ll deduct my share of the handout from the price of my next car.
Back to the comics …
If we’re going to offer bailouts and buyouts and other rescue options to these companies in the bad times, why aren’t we insisting on limits to their profits in the good times? It seems to me that companies that want to look to the government for assistance should be making substantial payments into an insurance fund when they’re profiting. And — immediately — they should be forced to cap executive compensation at a reasonable (and just) multiple of the average wage of their workers.
I have to agree with Jean’s point 5. Should we, as a society, allow ourselves to be painted into this corner? In high school I read a lot of Arthur C. Clarke’s future history, (or was it Robert Heinlein?) that envisioned large corporations with all the power. Maybe that’s where we’re heading. It should be our choice, not theirs.
For someone who claims to be not well versed in economics, you make some very good points.
I think that most knowledgable people are of the opinion that the fundamental problem is overleverage in all phases of the economy, but especially among our financial institutions. From reading the review in the Sept. 12 Commonweal, it appears that the recently published book by Charles Morris entitled The Trillion Dollar Meltdown, does a terrific job of explaining what’s gone wrong.
In the 1930′s this economy was challanged by a very similar crisis. The leglislative response was a series of regulatory laws that really laid the foundation of the post WWII growth. These laws- the ’33 and’34 Securities Acts, the ’35 Public Utility Holding Company Act and 1940 Investment Company Act put all public companies under some form of federal control, mandating , among other things, disclosure, uniform reporting, extent of leverage.
and intracompany transactions ( for utilities and investment companies).
It seems to me that we now need another regulatory revolution like the 1930′s. Bank and Insurance holding companies should made subject to enhanced federal regulation, complete transparency should mandated for all derivative transactions and investment banking firms should be limited as to the extent to which they may act as principals.
Many people are likely to be hurt in the aftermath of this current meltdown. Appropriate regulation could have prevented this!
Charles, all’s I know about any of this comes from my Ladies Luncheon and Socially Responsible Investment Club, dealing with my friendly credit union, and reading possibly the only investigative reporting story ever done by the Lansing State Journal about how much tax abatements for Oldsmobile cost taxpayers.
Oldsmobile, like many large corporate employers, many years ago started sent its corporate goons around to the city council saying there would be massive layoffs and people wouldn’t have jobs unless it got tax abatements. The council caved in on the spot, thus lowering wages for every worker in town who had to pick up Oldsmobile’s share of taxes for local road maintenance, schools, the libraries, cops, etc.
Mostly to be a pain in the neck, I informed the city that I planned to do a lot of work on my home with local labor, so could I get a property tax abatement, too? Maybe the letter got lost in the mail, because I didn’t get an answer.
Oldsmobile promptly closed after the tax abatements ran out.
I don’t know whether 1930 regulatory models will work now, but I’m not sure that what we’ve got is going to work either.
News this morning says stocks are down 300 points today despite the bailout. Which means that those with money in the market can plan on paying for bailouts AND see their investments fall.
For me, bailouts are strictly a matter of fairness. I’ve honored my mortgages and loans, paid my taxes, have no outstanding credit-card debt, and didn’t buy more house than I could afford. I never even took money from my folks to go to college on.
So I don’t cotton to paying thousands to bail out Captains of Industry who are dumber about their finances than I am.
$85B divided by 300M is about $283 per person, but your point is still well taken.
William, yup, you’re right. Thanks for keeping me honest. I don’t have to deal with more than five figures in my real life, so anything with more than three zeros confuses me.
“2. Doesn’t a bailout make all of us investors these companies? I don’t know if I got all the zeros right in my calculation, but $85 billion divided by 300 million Americans = about $28,000 for every U.S. citizen. When can I expect to see a dividend check from this investment? Soon, I hope, because my health care insurance co-pay when up $50 a month this year.”
I’m a little sketchy on the details, but my understanding is that in return for the $85 billion loan, the US govt is assuming something like 80% of AIG’s common stock. Unless trading on the stock is permanently suspended, then in theory the government could unload the stock onto private investors at a profit if the price happens to ever go up.
“4. Are there alternatives to a bailout? When Wild Bill’s Bedding and Mattress went belly up here, he liquidated his inventory, sold his building to Curves and squared up with his silent partners. AIG looks to have a pretty nice building, lots of office furniture and equipment, and probably has some assets it could liquidate. Why do they get a different deal than Wild Bill? Oh, right, because these companies are SO rich that if one of them goes down, the whole economy collapses.”
Presumably, Wild Bill went into bankruptcy for the orderly unwinding of his business. In theory AIG could have done the same, but we are being told that the worldwide financial repercussions would be so dire that what the US gov’t has done is the more prudent course. The collapes of the swaps market affects the entire worldwide economy, and so gets into geopolitics and security.
“5. Should we, as taxpayers, allow a corporation to accumulate so much wealth that if they go belly up, they can blackmail us for bailouts with threats of market panic? That would mean capping wealth, which I realize is against Mom, Apple Pie and the Free Market, but, then, so is an unsecured $85 billion bailout loan.”
At one time, financial companies were more stringently regulated. Since the Reagan days (and perpetuated by the Clinton presidency) the industry has been progressively deregulated. This has been justified on competitive grounds, i.e. banks in Japan and elsewhere weren’t under the same regulatory constraints as US banks and were consequently growing much larger and more powerful. As the industry deregulated, financial companies were free to get into these exotic financial instruments that hardly anyone understands and that nobody regulates.
ABC news actually had some useful info on this topic last night.
I learned that the COMBINED bailouts so far amount to more than $800 billion. I won’t embarrass myself twice by trying to figure out the per capita cost, but it’s going to be a chunkachange.
Yes, we now all own 80 percent of AIG, and the return on our loan, should they pull themselves out of the mire and pay it all back, is something a bit over 11 percent. I’m still curious about how many bailout loans are actually paid back in full with interest.
The report was tantalizingly vague in noting that the taxpayers would see a return on that investment. Whether this is going to be given to us individually, or go into the general fund–or perhaps some yet-to-be-developed bailout fund–is unclear.
“Oldsmobile promptly closed after the tax abatements ran out.”