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Running head: SHOULD THE UNITED STATES GOVERNMENT?

Should the United States Government Bail Out Failing Corporations

Billy Lawrence

University of Charleston
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Should the United States Government Bail Out Failing Corporations?

In 1932, the United States of America was mired in the Great Depression. The economic

state of the union was at a low point that the industrialized world had never reached. According

to History.com, the stock market crash in October 1929 led to investor panic, drastic declines in

consumer spending, and mass unemployment. Industrial production was bottoming out,

Americans were starving, and the number of homeless people was skyrocketing (2017).

President Herbert Hoover devised a plan that was, as called by Burton W. Folsom of the

Foundation for Economic Education, too big to fail (November 30, 2011). Hoovers scheme,

dubbed the Reconstruction Finance Corporation (RFC), was initially given $2 billion by

Congress to bail out the nations larger corporations that were failing. Folsom claims the RFC

sounded like a great plan. Banks were failing, railroads were going broke, [and] workers had

been laid off by the millions. The thought was, injecting cash into failing companies would

keep them afloat and allow them to hire workers. However, as Folsom explains, two major

problems existed. The $2 billion had to come from taxpayers. Instead of taking that money from

citizens to give to central planners to spend in ways that might not even create or salvage jobs,

Americans could have spent that money to buy radios, shirts, gas, or other items, which would

put people to work producing and selling these wares. Second, the RFC was under the

assumption that a collection of wise men could understand the U.S. economy enough to

discern which banks, railroads, and companies could revive the suffering economy with the right

amounts of funding. However, as Folsom states, when a chosen committee such as the RFC is

given large amounts of money to disperse, politics immediately enter the picture (November 30,

2011). Thus, a few questions can be posed today, as they were in 1932. Should the United States

government bailout failing corporations, do governmental bailouts of failing companies actually


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work, and if governments did not bail out failing companies, what would be the effects on the

nations economy?

Although some younger Americans may believe President George W. Bush was the first

to use federal funds to salvage the lives of faltering American companies, he clearly was not.

While Folsom may state President Hoover was the first, some scholars believe the act goes back

three decades before 1932. Kathy Gill of Thought Co. labels a Run on Trusts in 1907 as the

initial occurrence of businesses turning to Uncle Sam to save the day. Gill called the Panic of

1907 the worst and final banking panic of the National Banking Era, which ultimately lead to

Congress creating the Federal Reserve. The Panic of 1907 was ended when the United States

Treasury deposited $37.6 million in New York banks and provided $36 million in small bills to

meet runs on banks. However, as John F. and George A. Steiner explain in J.P. Morgan and the

Panic of 1907, this bailout was not solely backed by the federal government. Only $10 million

came from the treasury, while John D. Rockefeller supplied an additional $10 million, Morgan

contributed $13 million, and the economy was stabilized. During this process, President

Theodore Roosevelt was unable to assist due to his preoccupancy with a bear hunting excursion

in Louisiana (2012). Thus, a government bailout of business was successful, but it needed the

assistance of two private citizens.

In addition to the Panic of 1907, Gill also lists the RFC, the Lockheed loan of 1971, the

New York City bailout of 1975, Chrysler bailout in 1979, Savings and Loan bailout in 1986, and

Fannie Mae and Freddie Mac, AIG, and the Troubled Asset Relief Program, all in 2008 (January

13, 2017). Other industries have also received bailouts from the American government to remain

functioning. Daniel Wesley of Credit Loan mentions Penn Central Railroad, various airlines,

insurance companies, and other corporations as recipients of federal gifts and loans. He claims
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since 1970, the United States government has rarely resisted throwing around its financial

weight to keep certain businesses afloat (February 26, 2009). Wesley also states citizens are not

fond of using their dollars to aid corporations that are failing due to wrongdoings or poor

management. The government, however, claims these businesses are crucial to the nations

economy, and without them, America would be in more financial danger. Hence, are bailouts

necessary to operate the nations economy, or should these failing corporations be forced to be

self-sufficient or die?

It is possible bailouts will always exist and American taxpayers should expect more of

them in the future. Sharon Poczter of Forbes gives five reasons why bailouts will always occur,

and taxpayers will be responsible to pay for them. First, Poczter mentions history, as previously

discussed, tells us we should expect the government to act as they have in previous generations.

She notes that there have been over 140 banking crises worldwide in the last 30 years, and the

majority of them were met with publicly-funded bailout programs. Second, there is not a

substantial record showing what would happen if public companies were allowed to fail.

According to Poczter, the system may not collapse if industries are not bailed out, but then again,

maybe it would. To her, it is simply too big of a risk to find out. Third, calculating the actual

success or failure of a bailout is almost impossible. Most bailouts are not as simple as just giving

a corporation a handout or loan. Restructurings, purchases of assets, dilutions, conversions, tax

exemptions, and liquidations are often involved in government assistance, making it virtually

inconceivable to truly compute the negative or positive effects of a bailout. Fourth, and relayed

by Poczter with a comical, albeit truthful edge, No one knows how to implement Dodd-Frank

anyway. Over 13,000 pages of rules composed by over ten regulating bodies from six separate

governmental agencies are intended to reduce Americas financial systems risks and serve as an
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alternative to bailouts. As Poczter states, by the time all appeals and dissolutions of Dodd-Frank

were enacted and exhausted, the shocks caused by a financial crisis would have already been felt

and caused damage. Lastly, and maybe the most simple, yet believable reason: what president

would sit back and allow major corporations to fail and risk another global financial crises,

possibly one that makes The Great Depression pale in comparison (October 7, 2014). In

summary, it is just too large of a gamble to allow major corporations to fail and then determine

the effects of the results.

The sound of the term bailout can cause many to cringe. It evokes feelings of giving

gifts that are undeserved. It makes some think of paying to get a criminal out of incarceration.

The simple word bailout sounds unfair and unjust. However, Daniel Friedman and Daniel

McNeil of Bloomberg View give some insight into what a government bailout actually is.

According to the writers, bailouts are usually are investments, such as loans or purchases, not

gifts paid for with tax dollars. The Chrysler bailout of 1980 was a $1.5 billion loan. By 1983, the

automaker had paid it all back, with interest. The government actually turned a $660 million

profit, citizens spent less money, and jobs were saved. In the case of AIG, a largely successful

insurance company, a bankruptcy could have led to a global panic. Yes, the government did

inject a staggering $182.5 billion into the multinational corporation in 2008, but it took nearly

80% of the companys stock. One analysis found that by 2012, the United States government had

earned back its $182.5 billion, plus profited an additional $15 billion. Additionally, in 2013, the

government still owned 16% of AIG stock that was selling for about $34 per share. (June 10,

2013). Not all government bailouts turn out to be success stories such as Chrysler and AIG, but

some do, and can in the future. Therefore, as odd as it may seem, maybe bailouts can end up

being money generators for the government and boosts to the economy.
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Not all bailouts are surprising success stories, like Chrysler and AIG were. Friedman and

McNeil also mention the Troubled Asset Relief Program (TARP) and its mix of moderate

success and loss. The larger banks aided by TARP received about $230 billion and the United

States Treasury has recovered all of that, plus a modest gain of nearly $25 billion. Meanwhile,

the smaller banks helped by TARP still owe about $15 billion, and Friedman and McNeil believe

the public may never recover all of the $700 million from TARP. John Tamny of Forbes believes

bailouts do more harm than good and says that the 2008 bank bailouts restrict the banking system

from getting back on its feet. He believes business failure of any kind is tough for both investors

and employees, but it is also a sign of economic revival and that a capitalistic economy is

operating as it should. Tamny states business failure removes bad ideas, investments, and

management from an economic system, then allows the system to mend itself (March 6, 2011). A

capitalist system allows the markets to work when left alone, and intervention from the

government makes an economy less than capitalistic.

To many Americans, corporate bailouts may seem unfair because the people feel

companies are being saved, while private citizens are being neglected. For instance, in 2008,

when banks were being assisted by TARP, and AIG received nearly $200 billion in aid,

California lender IndyMac was closed by the Federal Deposit Insurance Corporation. According

to The Economist, anyone with more than $100,000 in savings endured substantial losses,

including a mother who had recently deposited her sons life-insurance benefits after he was

killed in Afghanistan (October 27, 2012). Cases like this can quickly sour any sentiment

Americans may have for faltering corporations that receive federal bailout assistance. The

Economist asks, Is the government too deferential to the concerns of the big banks and

insufficiently attentive to the needs of ordinary people? Should some of the attention focused
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on Wall Street be directed towards Main Street? Some citizens would answer both questions with

an emphatic yes. So, who is the real beneficiary of government bailouts? Barry Ritholtz of

Bloomberg View attempts to answer this question and give comfort to those concerned. He

claims bondholders were made whole, 100 cents on the dollar because of the relief programs

of TARP, Fannie Mae and Freddie Mac, AIG, and Citigroup (July 31, 2015). Thus, while it may

appear major corporations are the biggest beneficiaries of government bailouts, and in reality,

they are, citizens are also benefited by a rescued economy. Ritholtz also mentions that those who

suffered losses due to poor or reckless investment decisions were made whole.

If one were to justify or contradict the validity of government bailouts, they could use any

of several ethical principles to support their stance. For instance, those who may subscribe to the

ends-means ethic could make the point that an end result of a saved corporation is validated by

the means of using taxpayer dollars or sacrificing government programs that aid the public.

While increased taxes may be burdensome, the final result of a business that remains active is

well worth the cost. Also, the utilitarian ethic, in which the most good is done for the greatest

number of citizens, could be used by those in favor of government bailouts. Indeed, bailouts

normally affect some in a negative manner, but more are served than neglected or abandoned.

The principle of proportionality, where Steiner and Steiner explain leaders must weigh five

factors when making decisions (2012, p. 248), can be employed to rationalize the need for

bailouts. In this principle, the type of good and evil involved must be evaluated, the

desperation of the situation is considered, the likelihoods of good and evil effects are measured,

intensity of influence over effects is investigated, and potential alternatives are judged.

Proponents of bailouts may confirm that the risks associated with failing companies must not be

taken, and steps to ensure a thriving economy must be taken. Those who oppose bailouts can
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stand on the principle of equal freedom. Taking a citizens resources and giving them to a

corporation would deprive the citizens of their rights to those resources. Foes of bailouts may

also use the rights ethic, in which peoples rights are guarded against intrusion and personal

rights must be honored and respected, or the theory of justice, where fairness abounds in order to

build strong communities. Bailout detractors could argue that aiding corporations violates rights

and are unfair.

Government bailouts of failing corporations receive a lot of bad press, which leads to

unfavorable opinions from many citizens. However, as Poczter candidly, yet truthfully states, the

potential disastrous results of allowing these corporations to fail are not worth the gamble. While

they may be temporary financial inconveniences to taxpayers, they result in saved jobs, rebuilt

economies, and occasionally, a governmental profit.

References
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Folsom, B.W. (November 30, 2011). The first government bailouts: The story of the RFC.

Foundation for Economic Education. Retrieved from: https://fee.org/articles/the-first-

government-bailouts-the-story-of-the-rfc/

Friedman, D. & McNeil, D. (June 10, 2013). When bailouts make moral and economic sense.

Bloomberg View. Retrieved from: https://www.bloomberg.com/view/articles/2013-06-

10/when-bailouts-make-moral-and-economic-sense

Gill, K. (January 13, 2017). The history of US government financial bailouts. Thought Co.

Retrieved from: https://www.thoughtco.com/government-financial-bailout-history-

4123193

History. (2017). The Great Depression. A&E Television Networks. Retrieved from:

http://www.history.com/topics/great-depression

Ritholtz, B. (July 31, 2015). Who really benefits from bailouts? Bloomberg View. Retrieved

from: https://www.bloomberg.com/view/articles/2015-07-31/money-tells-us-who-

benefits-from-bailouts

Steiner, J.F. & G.A. (2012). J.P. Morgan and the Panic of 1907. Business, Government, and

Society. A Managerial Perspective 13th Ed. McGraw Hill Education. Green Park

Extension, New Delhi.

Tamny, J. (March 6, 2011). Necessary Bank bailouts harm the economy, Wreck the banks.

Forbes. Retrieved from: https://www.forbes.com/sites/johntamny/2011/03/06/necessary-

bank-bailouts-harm-the-economy-wreck-the-banks/2/#7c3b329b7fb9

The Economist. (October 27, 2012). Crisis mismanagement. How America bailed out the banks

rather than its citizens. Retrieved from: http://www.economist.com/news/books-and-

arts/21565142-how-america-bailed-out-banks-rather-its-citizens-crisis-mismanagement
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Wesley, D. (February 26, 2009). The history of US government corporate bailouts. Credit Loan.

Retrieved from: https://www.creditloan.com/blog/the-history-of-us-government-

corporate-bailouts/

Poczter, S. (October 7, 2014). Top 5 reasons bailouts will always happen (And taxpayers will

foot the bill). Forbes. Retrieved from:

https://www.forbes.com/sites/sharonpoczter/2014/10/07/156/#111fc313538c

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