The government has now approved a record $700 billion plan to try to stabilize US–and world–financial markets. The plan is not a total bailout as the media describes it; it is more of a government purchase of the stock of failing companies. The government is expecting a return on it’s investment, and, who knows, perhaps Uncle Sam will actually make money on this “deal.”
Of course, the government is doing the negotiating, so instead of using leverage to buy anything worthwhile, such as the senior preferred stock that Warren Buffet gets when he takes over a company (senior preferred stock gets paid first when dividends are awarded) the feds are getting non-voting stock. There is also no mandate that the stock be bought back, which means that a portion of the $700 billion will go to lobbyists maneuvering to have the stock perpetually “floating” so that it’s never actually repaid.
The extent of the global crisis, and the effect American markets have on the world, can be seen by the half-point interest rate cut instituted today by the Federal Reserve and five other central banks, the Bank of England, the European Central Bank, and the central banks of Canada, Switzerland, and Sweden, in a coordinated move to stimulate economic market.
The U.S. plan can now be compared to today’s announcement that the U.K. will offer the country’s major banks a rescue plan in exchange for preferential shares that will be benefit the taxpayer. The terms of the plan are still unclear: Fox News reports that the U.K. plan totals $87 billion, while BBC News reports that the plan could total 880 billion in U.S. dollars. Despite that the plan was announced today, the BBC News article contains highlights of the plan and a chart for how the plan could work. The article provides a clearer picture of the U.K. bill than most U.S. citizens have seen for the bill that took Congress two weeks to pass. The British policy demonstrates a clearer philosophy and more orchestrated plan than the bill that is now U.S. law.
I’m not an economist, but a plan that rewards bad behavior doesn’t sound like good government. The CEOs made risky investments. Some of those risky investments were government mandated, as the Clinton administration, and later Obama and the people’s friend Barney Frank, mandated that companies provide “affordable housing” by giving a percentage of their loans to people with credit scores, credit history, and paychecks that said they were unlikely to be able to make good payments. Since the government is a culprit, the government does need to be part of the solution, and the government does have to interfere with the economy to fix a mess it helped to create.
But the government didn’t mandate all of the risky investments. The Board of Directors’ made many supposedly “risky” decisions. But the decisions weren’t really risky. During the economic boom, they profited as the investments panned out. Now that the economy has slowed, the investments aren’t panning out. That doesn’t mean the investment was risky: under this plan, the CEOs get bailed out and still keep their profits. If they’re fired they get parachutes and are still rich. If they are kept on, their salary is limited to $500,000 per year. The average American sure would think they were in a risky situation with those prospects.
Why should the government save the failing companies? The argument is that the economy will fail if the market loses essential services, and that those services are fundamentally important to the economy. These companies aren’t the only one’s capable of rendering the services, however. By rescuing the companies, the government is preserving both the good, necessary services and the bad ones that got us into this mess: and even if the company has to sell off assets and subsidiaries to pay back stock, the bad practices continue.
Instead, the government could allow the companies to fail. When they fail, the essential services can be identified. The government can then give assistance to a new company, which agrees to adopt to liabilities and obligations of the defunct company that are deemed to be essential to the economy in exchange for the government purchasing stock to get the company started. Since the government has no business owning company stock, the stock could be tendered to the taxpayer as a tax rebate.
The taxpayer could then buy more stock, sell the stock for cash, or discover that they finally have an opportunity to enter the stock market. The government has spent comparatively little money to the current $700 billion plan, the CEOs have learned that risky investments do still exist, the essential economic practices continue, the taxpayer has a rebate to put into the economy, a new company is born, and the government is back out of the way.
I’m no economist, but it sounds like good policy if the economists could work out the details with Washington. Until economists have more input on the plans, and philosophy comes back to our government, we’ll continue towards becoming the S.U.S.A.: the Socialist United States of America