Now that America is deeply into the business of bailing out banks and big companies, it may be pointless to ponder the feasibility of it. But as Associated Press reporters put it in a recent article, "What if the government got out of the bailout business?" All those outraged Americans who picket Wall Street and vilify AIG executives might be surprised by the answer.
A good example of what happens when a large U.S. company fails is the story of Lehman Brothers Holdings Inc. When Lehman Brothers collapsed last September, it was "the biggest bankruptcy in U.S. history with a record $613 billion in debt." Because of the interconnectedness of global financial markets, this loss was felt in thousands of companies around the world and stocks took a nose dive.
"AIG is about five times bigger than Lehman Brothers, and we learned that Lehman Brothers should not have gone bankrupt," said Mark Williams, professor of finance and economics at Boston University. AIG, perhaps the most controversial of bailouts, has received over $170 billion in government funds so far.
According to the AP, AIG has reported to the Treasury Department late last month that "its collapse could batter credit markets, bankrupt the U.S. insurance industry, depress the dollar, increase U.S. borrowing costs and shatter consumer and business confidence everywhere."
While the viability of the AIG bailout is still in question, the $200 billion the government has spent on bailing out banks may be showing some returns. Bank of America, Citigroup and JPMorgan Chase all say they were profitable for the first time in a long time in January and February of this year. This news was the beginning of the Wall Street rally that has been seen recently.
So how does all this impact the average American? Despite having a 36 percent ownership stake in Citigroup, taxpayers aren't likely to be paid actual dividends. However, troubled financial institutions don't make loans. Credit is a necessary component of the American economy, and everyone from farmers to college students has felt the pinch from the tightening credit crisis over the last year. Bailing out the banks allows them to continue making loans on cars, homes and businesses.
Speaking of car loans, what about the bailouts given to the big automakers? Together General Motors Corp. and Chrysler LLC have received bailout funds to the tune of $17 billion and they are asking for billions more. That doesn't include the money the financing components of these two companies have also received.
The auto industry says that without the government funds millions of jobs would be lost and the result of that would "suck $400 billion out of the economy in three years." Chances are those estimates are a bit high, but there is no doubt that the bailout is just helping the automakers, but also impacts a whole slew of related businesses.
The bailouts certainly have critics, including former Federal Deposit Insurance Corp. chairman Bill Seidman. He is a proponent, among others, of nationalizing the big banks, cleaning up their balance sheets and then selling back into the private sector. "It is surely tempting to say the hell with them all," White House economic adviser Lawrence Summers said in a speech last month. But, he added, "You can't responsibly govern out of anger."
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