These Tough Economic Times: A 2 Part Series

The reason I didn't post last night wasn't because of anything too blog worthy, so we're just going to move on from that and speak instead about something that arose in my Economics class today. The plan was to begin a new chapter today based around the idea of the free market economy and how it exactly operates. However, it didn't take long for my professor to get way off base and start upon a tangent upon the current economic problems the United States faces and his own opinion about how the US Government is handling it. This, I have no problem with, especially with the knowledge and passion that he spoke with. The problem is, his view of the whole thing was greatly different than mine was, and because of that, I'd like to take this opportunity to examine both sides of the coin right now, mostly on the basis of what he talked about this morning. Then, later today or tomorrow, I will have another post giving what I found to be a very interesting solution to the scenario we face that came from a source which will remain anonymous (but it wasn't me).
So... to begin, I'll say my professor was directly talking about how the US government decided to bailout, or pay money to collapsing financial institutions that were about to go out of business last year. He mostly made AIG the posterboy for this scenario, but also strongly alluded to General Motors. He essentially called the bailouts the stupidest thing he has ever seen. Here's why:
It was by their own doing that AIG (and the like, I'm going to stick with that example for the sake of time) basically collapsed upon themselves. They grew too big as a corporation and hurt because of it. In their massive growth they diminished most of the significant competition around them, and therefore, killed themselves because competition is the essence of what keeps free enterprise growing and thriving. Without the competition, there was no growth, there was no prosperity and there was only the potential to sink to financial catastrophe. So, why should the US Government, save them? Why is that necessary? They are a company just like everyone else, and this is an unprecedented move in the history of free enterprise. By keeping AIG alive, you're not letting the market take its course. Bankruptcy is a cleansing of the market and by keeping AIG afloat the market isn't cleansed. Furthermore, you're rewarding the bad behavior of AIG's executives. And even furthermore, you're setting the precedent that it is okay for big corporations to get so huge that they will collapse upon themselves, because in the end the government will be there to bail them out. So the government is paying to keep these companies alive and then when they stay alive the executives use the money on big bonuses for themselves that they clearly don't deserve. And all of this comes within the spectrum of a situation where the US government is in trillions of dollars of debt, over a trillion alone last year in fact. All because the government deems that if they companies fail it will have too severe of repercussions on the rest of the economy. Lastly, free enterprise means having the right to succeed, but it also means having the right to fail. If something is failing then the market should be allowed to take its course, eventually things will grow and get better again.
Now this all makes sense doesn't it? It really does, and I entirely understand this point of view, but I feel there are a few issues.
AIG is an insurance conglomerate. They give insurance to anything and everything you can think of. The problems came in that they insure housing construction-type people who build houses and expect money when someone buys the house. AIG backs up the purchasers in cases where the purchaser doesn't pay their mortgage. So if someone doesn't pay their mortgage for the month, AIG has to pay for it. When people actually pay, AIG makes a killing because they gain the premiums from the housing people and luck out that the purchasers have paid their mortgages. The issue came in that people were buying houses they couldn't really afford in the mid 2000s, and eventually weren't able to make the payments. This happened a lot, and AIG went into a downward spiral. With this in mind, I think its fair to say keeping AIG alive was necessary. Without AIG and companies like it house builders wouldn't have any confidence in the market, and would stop building in a market that has already seen great decreases due to foreclosures. I haven't even mentioned how this scenario would make interest rates skyrocket as well. That just means so many more lost jobs and higher unemployment and more problems that spread throughout the economy. The same could be said of General Motors. If General Motors were to disappear from the midwest, the unemployment rate in these states would skyrocket, and no one would be able to afford... anything. Which just makes the economy even worse. So, with this in mind, it appears as though some of these corporations really were "too big and important to fail".
I know I'm oversimplifying, but I feel the two schools of thought meet at one major difference between them. The hands-off approach of my professor is much, much more future-oriented than the interference approach of the Obama administration, which is much more present oriented. Its comes to this scenario:
Its all probably very fair and true that eventually if you let the market do its own thing, things would probably sort themselves out. I mean, if that many people lose their jobs and nobody is buying anything, prices will have to come down, and therefore so will the standard of living. Eventually, more people will be able to afford more things, and although their wages will be less as there becomes more demand for these lower-cost products more employment will be needed to fill the void, and in the mean time the lower wages will still be good relative to the lower costs. It makes sense, and the government doesn't have to spend a dime or take a risk of its own financially in the process, not to mention the just-due of those people that failed their corporations will come.
BUT... How long exactly would this take? Months? More likely years. What about all the people out there looking to do things right now? What about those that want to retire, or those that are looking to enter the world of employment as they are just out of college. The world doesn't stop for them so they can wait until things get better. If they can't do the things they need to right now then they are in serious trouble. Doesn't the government have the obligation to look out for its citizens? Doesn't it have the obligation to ensure that people can pursue their happiness? That opportunity is pretty much null and void for those 2 groups that I just mentioned in this instance, those two groups that either just spent their entire lives busting their butts to get themselves to a better position or just busted their butts in the classroom, and potentially spent thousands on an education to get themselves somewhere better will get nothing. After all that, they have to be told to wait, because the market is bad because corporations they have no relation too misled themselves entirely? That's sounds just as stupid as anything else.
So where does that leave us? I'll say this much. Government bailouts aren't the only thing keeping this economic system from truly being a free enterprise, and that fault lies just as much in the corporations as it does in the government. The game isn't played fairly. Executives were giving themselves unbelievably gaudy bonuses before this whole scenario began and they didn't deserve those either. You don't have to look any further than Enron to see how dirtily the game can be played. Business executives don't care about anybody, except themselves and their own greed. Something has to be done in order to keep these people in check that knock our economic system out of whack. So why shouldn't it be the government's duty to oversee them? They can look out for the rights of the individual this way.
Does that make the bailout acceptable? I would say yes. There were a lot worse options and I'm sure any option would have some negative repercussions to it. I feel like this was, for the most part an acceptable practice, but it did have significant flaws. The one that sticks out to me is no guidelines to how this bailout money was to be spent. It was meant to preserve these companies, not line the pockets of the executives, and the lack of guidelines makes the whole scenario a little startling. With all that said, what's been done is done, and it was done with great intentions. Time will really tell if it works, but I'm already liking some of the growth we are seeing. We have to just hope for the best.

-Hype