It is becoming a bit of a routine: every few weeks I will wake up to the news that some big firm, “too big to fail” needs to be bailed out (yet again). This week it was AIG. Billions of dollars are already being negotiated by Congress for the new emergency bailout before I even drink my morning coffee — and all just for the asking. AIG seems to be taking turns with Citigroup, GM, Fannie Mae & Freddie Mac.
Billions of dollars of taxpayers’ money going where exactly? To the companies of course, but how is it being used differently than the last time that gives the taxpayer any reassurance whatsoever that it will make a difference this time around? It is deeply unsettling how evasive the answer to this latter question has proven to be.
Lets be clear, I believe that a positive & long-run outlook of the economy is the best attitude to have, otherwise consumer confidence is doomed to be in the doldrums indefinitely (In fact, it can lead to a self-fulfilling prophecy of stagnation: if we do not believe the economy is doing well we will not spend & the economy will not be doing well). In order to keep this positive & long-run attitude, however, we need to have some assurance that spending is safe (in stocks, for example, but also in basic commodities).
It is not at all reassuring to witness the government spend so liberally on bailouts in order to stem the spiraling path of the economy, and at the end of the day, only be able to boost the Dow Jones & other market indexes on the day of the market-cash infusion announcement; then see those gains lost miserably two days on with the markets hitting a new low (this, of course, alongside the increase in deficit implied by the spending). There is too much volatility in the markets. That is having the long-run optimist worry. This is not good.
I trust the Obama Administration to be one that relies on careful & expert judgment. After all, a whole commission for economic recovery has been convened comprising of private sector, labor & academic figures. The convention of this commission is most laudable, yet I am starting to feel greatly uneasy about what appears to be the continued & unquestioned fulfillment of bailout requests for corporate entities.
In the first round of bailouts AIG, Citigroup & other financial sector firms requested federal funds to ease inter-bank lending. They worked out the numbers & came out with a handsome figure that would help them through the slump. Such government intervention is appropriate & was necessary the first time around, but why is it that we are having second and even third waves of bailout requests ? How come no one is asking why the initial cash is already out and how it could have been used more effectively?
Actually the latter question has been asked by a handful, and the answer has been that an important portion of the first bailout package was hugely important in stopping a freeze in inter-bank lending that would have otherwise brought the economy to a standstill. Yet, there is another important portion of it that appears to have been used much less wisely, and without much oversight or accountability. An apparent deadweight loss. And now these companies are asking for more?
Was the accounting done incorrectly the first time around? And why isn’t more restructuring demanded from these firms? How about liquidation of assets? (Fannie Mae has its most portentous headquarters on prime real estate property in northwest Washington D.C. The historic building cannot be inexpensive to maintain.) How about breaking up a company into separate corporate entities? How about structural reform in corporate business models? How about government intervention that demands step-by-step restructuring deadlines, with bailout fund disbursement contingent on achieving pre-established goals for each phase, with a finite & non-renegotiable bailout price-tag? AIG has been scarcely transparent in their corporate restructuring plans and yet it feels entitled to more…
And, for other industries, and namely the auto industry, I know it would be a heartbreak for the United States to see GM go — a very economically painful heartbreak. This heartbreak, however, is starting to appear far more appealing than the one induced by heavy spending to save a company that has done relatively little to restructure (in comparison, to say, Ford, who after the first bailout negotiations for the auto industry realized that its survival relied on being a smaller firm & is restructuring accordingly). It needs an ultimatum, and one that provides a survival choice that is spelled out as such & which includes specific immediate-, short- & medium-term restructuring goals in the context of a finite bailout budget. The other option for all of these companies has also to be an option: namely, non-survival.
After the government allowed Lehman Brothers to fail and felt the aftermath of the financial sector unraveling, it is very hesitant to really consider this choice for other firms, fearing another spiral. Nevertheless, every time a company makes another request for funds, perhaps because “they are too big to fail” we sustain another blow in the markets & confidence all but freezes. This is in part because we are no longer sure that the government can really save them, but also because we have not really seen what is different about them since their first bail-out request & so their potential failure is one that implies, in the eyes of many, government inefficient spending (also known as waste).
I really hope that periodic restructuring audits for bailout recipients, as well as a more transparent flow chart of government allocations & conditions for lending (including bailout limits) are put in place. That may be very painful (as it may imply some failures) & take us crash-landing to the bottom, but it is not until we reach that bottom that we can build up. It is simply most important that we sustain confidnece in the governments’ recovery plan. The uncertainty of whether bailout money will work or not in the absence of any regulatory changes & conditions is doing exactly the opposite: extending the horizon of caution & withholding for consumer spending & thinning the ranks of long-term optimists. This is not good news for the economy.