Congress allocated $700 billion to bail out bankers who were coerced into making subprime loans. Providing money in the form of loans to the financial institutions even though distasteful seems logical. Providing the cash for retail business and manufacturers should allow them to keep their doors open. If they are building and selling they can keep employing people. If people are employed they will be buying and spending.
Henry Paulson, Chris Dodd, Barney Frank and the news media insisted on immediate action. The rationale being the markets will collapse if action is not taken. A number of economists protested that more study was needed. The economists and taxpayers were ignored.
At first, congress rejected the bailout but sold out after $180 billion of pork was added to the bill. This brought the total up to $880 billion. No structure was set up to manage the package. Henry Paulson was given carte blanche to spend the money where he deemed proper. The first thing he did was bail out AIG, an insurance company. The rationale was that AIG is too big to go under. The fact that Goldman Sachs (Henry Paulson’s previous employer) owns AIG was not mentioned.
As soon as the $700 billion was established the possible recipients began lining up for some of the money. One of the first to ask for money was governor Arnold Schwarzenegger seeking $8 billion. Not to be outdone the City of San Jose California asked for $14 billion. The Detroit car companies are asking for $25 billion. Numerous other states, cities and counties are considering asking for bailout money. One can see where this is going. There are 251 cities with populations exceeding 100,000. There are 50 states and 3,141 counties in America. How many of these that are in trouble are impossible to predict. One thing is certain, municipal revenue is directly tied to business. If business slows down the revenue goes down.
Bailing out financial institutions is supposed to free up cash for day to day business expenses. At this point we don’t know if this is working. No sharp turnaround has occurred yet, but it may be working.
The auto industry, cities, states and counties have been in trouble for years. Long before the subprime loan situation, they have been for trouble. Their problem is unfunded mandates. They have all entered into union contracts with unsustainable retirement and healthcare costs. These costs will continue for decades to come because they are not a onetime expense.
There is simply not enough money to bail out the cities and states. If only half of the cities and states ask for money at $1 billion each is $150 billion. It is difficult to believe that they will only ask for $1 billion apiece. California is asking for $8 billion and the City of San Jose is asking for $14 billion. American Express is asking for credit card losses. MasterCard and Visa can’t be far behind. We simply cannot bail out everyone.
As harsh as it sounds, let the mismanaged businesses and cities, states and counties go under. Take the hit and move ahead. Change the laws and make elected officials and corporate officers liable for mismanagement. Over and over we see elected officials moving from one financial mess to another without any personal risk. The same goes for corporate officials in many cases.
The idea of putting government in charge of our economy is foolish. Remember the Moonlight Ranch. The Moonlight Ranch, a well known Nevada brothel, was taken over by the IRS when Joe Comforte (the owner) failed to pay his income taxes. However the IRS couldn’t make a profit running the brothel.
Other examples of government mismanagement are US Postal Service, Amtrak, and FAA. After a year of hearings the FAA can’t do anything about airline passengers held hostage on tarmacs without water or toilets that work. As one who remembers the Great Depression, I know the government programs only prolonged the depression.