Who should get the Bailout?
During the financial crisis of 2008, Wall Street banks received massive taxpayer subsidies to stay afloat. They were “too big to fail,” a policy based on the belief that these companies, if they folded, would cause the entire economic system to collapse. This was a massive public bailout of the very financial institutions that had precipitated the crisis by irresponsible action (such as creating and trading subprime loan bonds) from which they reaped huge profits.
To be fair, the financial system did eventually recover. However, fundamentally the taxpayers were not reimbursed and there were few repercussions for the recipients. Executives kept their jobs. Traders kept their bonuses. And the system, despite new regulations, perpetuated itself, albeit with fewer players after the recovery. Sadly, they are at it again: making poor loans, reaping huge profits from speculative trades, and paying out huge bonuses. Corporate America has followed suit.
Now we are in the midst of another economic crisis, one triggered by an external health emergency. It is exposing the underlying weaknesses of some companies. On the horizon is a government “stimulus” plan. Purportedly, the government will be paying out some funds directly to affected workers, but more significantly, it will be throwing vast sums of money at large corporations that are having financial difficulties.
In our response, we must recognize that “all” businesses are suffering not just large corporations. Sadly, “Too big to fail” could be renamed, “Too small to care about.” Large corporations will be bailed out, but small business will basically be left to fend for themselves. They are too insignificant to get much attention. Is it because collectively they don’t make the huge donations that fund the gross excesses of our political system?
Big companies have, significantly participated in the robust recovery and many reaped substantial profits. However, most did not prepare for the inevitable downturn. Instead of accruing capital reserves, they undertook stock buybacks and other actions to simply bolster short-term stock prices. While we must acknowledge the unprecedented nature of this downturn, we must also recognize that many of the businesses asking for handouts failed to take even modest actions to be able to weather a storm.
Furthermore, we have a mechanism to deal with failing companies without extorting the taxpayers. It is called bankruptcy, which comes in several forms. One is liquidation (Chapter 7). This is the catastrophic specter that is propagated by the government officials and the corporations likely to receive the bailout. “If we let this happen, whole system will collapse!”
However, there is another method (Chapter 11) which freezes obligations and allows for a restructuring of the business. Typically, the creditors are at risk of not receiving their money back. While disruptive, this does allow businesses to continue to function with restrictions.
In either case non-performing assets are generally stripped away, leaving the remaining operations in a position to regenerate. Often someone will acquire these and put them to work in a more efficient form. Warren Buffet has made a fortune doing just that. In fact, Berkshire Hathaway has recently acquired significant holdings in Delta and other airlines. With such backing one might ask why the government needs to step in?
There is another more insidious issue, the ever-increasing intrusion of government into the private sector, what might be termed, “Corporate Welfare.” Businesses have little incentive to act responsibly if they believe that in the end the government will absorb the cost of their missteps. If your child is never disciplined, they will likely continue to misbehave. The same is true of corporate America.
In a bold (and politically savvy) gesture, former UN ambassador Nikki Haley stood by her convictions and resigned from the Boeing board of directors. She stated, “While I know cash is tight, that is equally true for numerous other industries and for millions of small businesses. I cannot support a move to lean on the federal government for a stimulus or bailout that prioritizes our company over others and relies on taxpayers to guarantee our financial position. I have long held strong convictions that this is not the role of government.”
We all realize that nothing is simple. The failure of Boeing would affect not just its employees but hundreds of people who work for its suppliers and subcontractors. However, Boeing’s problems rest as much with its flawed products (737 Max and military KC46) as the coronavirus. Should our government use tax-payer money to prop up such an operation?
In its rush to act, the government is likely to act irresponsibly (again). After cutting interest rates to zero, the Federal Reserve is now promising to purchase corporate bonds and there is a clamor for them to buy mortgage-backed securities, the very instruments that caused the Great Recession a decade ago. What conditions will be placed on the behemoths for the subsidies they will receive? Intriguingly, it is the Democrats that have forced the legislation to include some modicum of oversight; the Republicans just want to the money to flow.
Perhaps my greatest concern is for small businesses. Look at our own community. Local governments have incentivized the growth of retail and hospitality businesses, in large part to generate tax revenue. These businesses, like restaurants and stores do not have huge numbers of high-paying jobs. Someone working primarily for tips does not have the wherewithal to weather a lengthy shutdown. How many hard-working people in our community will suffer? How many small businesses will never reopen their doors when this is all said and done?
In a gross violation of my own principals, I will state that “if” the government is going to spew out huge sums of bailout money (which it will), they ought to put small business support near the top of the list (which they won’t). A failing corporation may find an angel investor, or perhaps a corporate raider to yank their fat out of the fire. It is a virtual certainty that a small business will simply slip quietly into the dark night, never to be seen again.
That is the tragedy of our political and economic systems today.