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Government Bailout Who Benefits Essay

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Stephanie N. Herr
November 30, 2008

The Government Bailout, Who Benefits?

The big three American automobile companies are showing considerable operating loses.  GM is losing $1 billion or more a month.  How does a capital injection help?  The companies will just burn through the cash (using it to pay labor or pay off debts, old and new, until it is gone).  The banks, on the other hand, that are receiving bailout funds have operating profits, they can borrow low and lend high, but suffer from capital requirement issues, which limits what they can lend.  A capital infusion helps meet capital requirements, frees up lending and the banks can make a profit.  Auto companies are not similar.  Unless the auto companies can build and sell a car or truck at a gross profit (a profit neutral of debt service or taxes) it makes no sense to bail them out.  They should be liquidated.

The United States has been debating what to do concerning the foreclosure and banking crisis, with the answer being the consideration of a 700 billion dollar bailout. This bailout would benefit the middle class who have enough money and credit to buy a house, but give little benefit to the rich who may already own several houses, nor the lower classes, who are not typically able to afford a house. The current focus seems to be on helping only those middle-class people who made financially foolish decisions. Our nation's working poor most likely cannot get access to bank loans, and must resolve on check cashing stores that loan money at over 14 percent interest. These working class and poor most likely do not have enough credit to qualify for a loan, so the bailout to the middle class will give little or no benefit to this specific group. The bailout is for the moderately rich who were careless with the use of their strong credit and ability to borrow cheaply on an almost continuous basis. According to the U.S. Dept of labor, the number of workers in June 2008, among working class, as defined as construction and manufacturing non-farm employment was 21,565 thousand workers; retail trade at 15,324 thousand workers, leisure and hospitality 13,679 thousand workers (United States Bureau of Labor Statistics). Would such a bailout benefit these workers, when this group includes many who are struggling to simply survive in our society? The U.S. Government may be increasingly controlling of the economy. Rep. Rob Bishop, R-Utah, worries about "a permanent shift of power and financial responsibility to the federal government." The bailout may simply put more power in an ever smaller number of people. Unlike the auto bailout, this bailout doesn't allow us to keep jobs or generate commerce plus, they were not adversely affected by the economic crisis. After already giving them $25 billion, they are still foreclosing on our homes, charging us loan shark rates on our credit cards, and refusing to loan money to business resulting in more lost jobs and no commerce whatsoever.

The goal of the new bailout is to free up credit in consumer credit markets -- mortgages, car loans, student loans, and credit card loans.  The mechanism of choice is interesting -- $200 billion, in a Term Asset Backed Securities Loan Facility, and $500 billion to buy MBSs (mortgage backed securities) guaranteed by Fannie Mae and Freddie Mac.  The government is buying asset backed securities generated by the now notorious securitization process or structured finance.  Academics and journalists argue that the securitization process so dilutes accountabili...

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