Misconception of Bailouts

I have noticed that there is a real misconception to the American people of the 'bailouts' that have been passed through in this country. Everywhere you look, the populist media shouts about how Wall Street has plundered our country. I gather that the average American thinks that the government just opens its checkbook and gives free money to these organizations with no strings attached. But that is not correct, they are loans (or warrants/preferred stock). So far, the government has earned an 8.5% return on these loans and most major firms have already paid back the funds. That 8.5% return probably has to go down in the history books as one of USA's greatest investments. It's not quite up there with the Louisiana purchase, but it sure beats the crap out of the paltry treasury rates it peddles. So quite technically, so far taxpayers should be happy about the financial bailouts. But unfortunately they hear the word 'bailout' and think that someone out there is getting free money, and they don't like that (ironically, they don't complain about 47% of American's not paying federal taxes and getting a free ride).

Cash for clunkers was a true bailout. Taxpayers got fleeced in this one. It was sold under the guise of improving the fuel efficiency of the transportation capital and stimulating the economy during a recession. Really all it did was keep the US automakers from going under (for now!). Many of those who received the cash for clunkers were going to buy a new car anyway and the rebate just moved up the time-line for those buyers. Business week reported on the numerous flaws this program had, such as the limited number of people who will desire to start making car payments in the middle of a recession. And in another article stated, "In the end, the bill was written to help companies, especially in Detroit, sell more pickups and SUVs, which earn the struggling automakers more profit than smaller, fuel-efficient vehicles." So the whole rhetoric about fuel efficiency and stimulating the economy is out.

The automakers also received loans from the TARP program, but you only hear the American public crying out about those big bad banks. Banks serve a much more important purpose in this economy than automakers with overpaid unionized workers who have been struggling for years to pump out overpriced gas guzzling earth destroyers. If you look at the historical record, bankers have always gotten a bad rap. But they serve an important purpose to any modern economy: provide capital to businesses collected from millions of savers. The bankers make a profit, the savers make some interest, and the business gets a loan - everybody is a winner. The US automakers have been losing market share for years. It is only a matter of time before these organizations die because they cannot compete with the quality produced by other nations (primarily Japan).

Perhaps the banking situation was extraordinary and what is done has already been done. But going forward, the government should either stay out of it and let them fail or prevent firms
from getting too big to fail in the first place.

Capitalism is the business version of "survival of the fittest."