Bail out policy proposal

Policy Proposal submitted by a student.

Our government has spent money bailing out banks and other big industries. We have done this to save our economy. Our economy is still shaking, and many more companies are asking for bailouts. My suggestion is that instead of bailing out big industries we should bail out the taxpayers. People are losing their jobs. They do not have enough money to make ends meet. Therefore they are cutting back on their expenditures. If the government would take the amount of money they would spend on a bailout and distribute it evenly to all taxpayers, then that would boost the economy and the companies would no longer need bailouts. This is something that has never been done on a large scale before in this country. Our leaders have always depended on the trickle-down effect before. Obviously this is not working. If the American consumer had a large sum of money then they would have the means to buy cars, to put in savings accounts, to pay their bills, or to even buy a house. This increase in revenue would create a demand, which would give people their jobs back. It is time for the government to give back to the constituents that voted for them.

Student's analysis of their proposal.

I chose to write the above proposal because it is one of the federal-level policies that I care about. Right now the economy is very vulnerable. I realize that the government will never bailout the Average Joe. They say that financial independence is the responsibility of every individual. Then they go and reward bad behavior. They give money to the people that are some of the reason why our economy is in shambles, and they leave them in charge with few stipulations.

I actually got this idea from an email I received around the first bailout. A guy had actually figured out how much each U.S. tax payer would receive if the government would give us the bailout instead. I cannot remember the amount, but I do remember thinking that with that amount of money I could pay off my house, buy a new house, and buy a different vehicle and still have some left over. The email was just a joke, but it makes sense. The economy is not going to get better until the middle and working classes have money to buy products. Until they do people will continue to lose their jobs because there is no demand for the products they are producing.

My response to my student:

There is something to this. The government can “invest” $700 billion in the banking and financial sector, and expect to lose perhaps half of that investment in the long-run, but in the mean time the banking system will be propped up so that it doesn't collapse. Or, that same money could be used for something else. For example, the United States could establish a public bank that would give refinancing to everyone who owed money on a property, with 50-year 3% mortgages. All the commercial banks would get rid of their “legacy assets” as everyone refinanced using this public bank. This would in essence be “giving” money to Americans (people who are paying 5% or 7% interest would be paying half as much in interest, and keeping the rest for themselves). It might drive some banks out of business, but other banks that are bring driven toward bankruptcy because so many of their loans have gone bad will be saved as the people who are defaulting will transfer their debt to this national public bank.

If you divide $700 billion by 305 million (approximately the population of American citizens) you get a figure of $2,395 per each American. That is unlikely to be enough to help very many Americans buy new cars or houses. If you use a figure of $1.1 Trillion you still only yield $3,600 per American.

The $1.1 trillion is going to the following things, according to ProPublica:
$247 billion for banks.
$100 billion for purchase of bad loans (“toxic assets” or “legacy assets”).
$70 billion to prevent AIG from going bankrupt.
$60 billion to keep Fannie and Freddie Mac running.
$50 billion to help prevent foreclosures.
$25 billion to help auto companies avoid (or prepare for) bankruptcy.
$79 billion for other things.
$470 billion ready for whatever.
And by the way, there is a $500 billion line of credit for the FDIC, which may draw upon that to take over some of the largest banks that may be going insolvent.

Now, I wonder what would happen if the government gave nothing to keep up the banks, did nothing to buy toxic assets, let AIG go bankrupt, let Fannie and Freddie Mac cease operations, let the auto companies go through bankruptcy, and passed on the cost savings from all that to taxpayers. That would give each of us $2,000, and families with four persons would have $8,000. On the other hand, such a policy would mean that probably AIG, Bank of America, Citigroup, J.P. Morgan Chase, Wells Fargo, General Motors, Goldman Sachs, Morgan Stanley, U.S. Bancorp, Chrysler, Capital One Financial Corp, and American Express would all go bankrupt, along with about 100 other banks and financial companies and industrial companies. That would be okay if there were some big and healthy banks or private equity funds somewhere on the planet who could buy them up when they went bankrupt. However, the banks in other parts of the world are also in very poor financial condition. With so many of the most important banks going out of business, many companies would have to pay on the credit default swaps (billions of dollars promised as insurance that the big firms wouldn't collapse, so that entities owed money by the big firms would cover their losses if those big firms went bankrupt). This would create a domino effect that would cause the failure of almost all the large banks on the planet. Every major equities market on the planet would crash. It's entirely plausible that the only large financial institutions left standing would be ones that had been taken over by governments and central bankers.

Since almost all large companies depend on these banks to provide short-term credit to help make payroll and so forth, there would be very serious problems at most major companies outside of the financial sector. Layoffs and bankruptcies would multiply. The unemployment rate could go from 8.5% to 28.5% in a few months, and the stock market and equity markets all across the globe would drop by 80% or more. Consumer demand would drop like a meteor crashing through the atmosphere.

Tax revenues would drop and state governments would need to cut spending by 30% or more, but because there would be such high unemployment, the demand for government services (especially unemployment relief) would be very high indeed.

But, at least every American would have $2,000 or $3,000.

I agree with you that it is aggravating to see our money to go pay off the problems of the financial sector. I’d like to see the government take over all the big companies and fire all the managers and administrators, and replace the speculative financial sector with some sort of super-powerful national public bank. But then, I like the idea of planned economies and public control of key sectors in the economy (in economics I like some aspects of socialism), so for me this would be quite acceptable. But, practically, it’s not going to happen. The bailout is the policy we’ll get. And we've got to push for the best bailout we can get. One that will save world capitalism without throwing the world into an economic free fall that would make the 1930s look prosperous. One where American taxpayers aren't entirely ruined. One where the financial sector is tamed and the people who run that sector are knocked down to a humble size.