Why the Bailout?

As our government racks up trillions in debt many wonder why our tax dollars are being spent to “bail out” large corporations.

Really there are many sides of the debate and it is based on our current capitalist system. Capitalism is the belief, both economic and philosophical, that individuals and corporations have the power to buy, sell, set prices, and profit from whatever business they choose. Of course, this system only works if a government system exists that protects the freedoms and rights of individuals and corporations. Rather than debate whether or not capitalism is the “right” system, we’ll focus on why it appears that the government is bailing out the very individuals and corporations who got us into this mess.

By now we all have a basic idea of the many things that caused our current crisis. It was a combination of bad policy, poor judgment, and over-leveraging. All of these problems culminated into a crisis due to the ignorance of the risks.

Those problems originated because our current capitalism functions based on leverage. Individuals borrowed to make purchases. That lending was made based on that individual’s assets (a home, future earning ability, etc.) Businesses borrowed based on assets, future assets, etc. Banks borrowed based on their ability to collect on loans and assets. All made the decision to borrow in hopes to better their position. Many borrowed foolishly. These individuals, banks, and corporations over-leveraged to the point that when their leveraged assets diminished in value (remember that value is based on the judgment of others), the system crumbled.

The collapse of many banks and the significant drop in value on one of the most largely used asset, the home, has caused the system of lending to suffer. Many banks, that had become over-leveraged, are in a seemingly never ending process of trying to get some value out of the assets they do have. Because these banks’ assets have a currently unknown true value, other banks, who hold similar assets are being forced to mark down the value of their assets. This mark down has caused many banks to stiffen lending practices.


With lending more difficult to come by, individuals and companies (regardless of how good they had been with their finances), are not able to make purchases or even make payroll. As I have mentioned before, the velocity of money (or the rate at which money moves through the system) dropped significantly last year.

So, why should the government “bailout” these corporations and individuals who made poor decisions? Because what they did caused money to slow significantly in moving for the rest of us. What is at the heart of the debate, or at least should be is: What can be done to get money moving again while doing as little as possible to help these individuals and corporations?
The government, in following with its role of protecting the rights and freedom of individuals and corporations, has been pushing many different ideas to help get money moving through the system again. Like everyone else involved though, the government is far from perfect, and in hindsight hasn’t made all good decisions.

The latest plan, the Financial Stability Plan, (see the fact sheet at http://www.financialstability.gov/) introduced by Secretary Geithner, makes the attempt of throwing water on all of the fires currently in the financial system. Will it work? I don’t know, but this is the first plan that targets all the problems and not the manifestations of those problems (I know, how come we didn't have this several hundred billion ago?). One question with these plans, is how involved will the government remain once growth returns? If they stay too involved then capitalism is hampered where they stay.

This current crisis and its many problems are precisely why, in a capitalist society, the debate will always rage on how individuals can pursue their dreams and how the government can “protect” the rights of everyone in those pursuits.


As for our current problems; if we can get money moving through the system again; then individuals and corporations will be able to pursue growth again. That growth will likely take time because it will take some time for the money to move through the whole system.