Do We Really Need Bailouts?

Actually, in my less-than-humble opinion, we likely do.  But I was not always in favor of that idea.  Perhaps the most notable bailout in my early lifetime was the Chrysler Corporation bailout back in 1979.  In actuality it wasn’t really a bailout in that taxpayer money was given directly to Chrysler as seems typical in today’s bailouts, but rather it was loan guarantees provided by the government in which Chrysler could secure the needed cash.  Nonetheless, public opinion at the time saw it as a government bailout of a large corporation and reacted accordingly.  Many felt that in a pure free-market companies should be allowed to survive or fail based on basic Darwinian philosophy, survival of the fittest.  Many, like myself at the time, were entrepreneurs with our own businesses and would have loved someone to bail us out during the lean times (which were many).  Others thought the “bailout” was good for the country because it saved jobs, rather than tossing a few thousand employees into the unemployment lines where the taxpayer would have to bail them out individually.

The loan was paid so early the government didn't know how to cash the check.

The fellow running Chrysler at the time was the famous and very dynamic Lee Iaccoca.  He managed to convince the government to provide the guarantees, in turn Iacocca developed the K-car series, Ominis and Horizon models and minivans, that became hugely popular.  He ended up acquiring Americam Motors (AMC) and inherited the Jeep name, which added to the revitalized Chrysler sales and profitability.  In an unprecedented display, Iacocca paid back the guaranteed loans seven years early… and made a big public PR event of handing the check over.  Together with his unprecedented TV commericals where him as CEO would proudly proclaim the quality of his products (which led to the CEO’s of other companies also being in commecials.. even to this day) over the Japanese, Iacocca became immensely popular to the point that people wanted him to make a run for the Presidency.

Iacocca with K-Car

I lived in Rockford, IL in those days, and I owned and managed a small retail electronics business just 15 miles north in the Wisconsin town of South Beloit.   As fate would have it, that area was smack in the middle of the Chrysler controversy (the area was also in the economic workforce center of not only Chrysler but also GM up in Jaynesville, WI).  The Chrysler assembly plant for making the K-cars was about 15 miles southeast of Rockford, in Belvedere, IL.  Also, as part of the re-organization process for receiving the loan guarantees and financing Chrysler had to get the agreement of all it’s creditors… venders, banks, etc… to not sue for payment.  If even one creditor were to file then that would make the entire process invalid.  When you think of Chrysler being a national corporation it’s easy to imagine having to contact all of the creditors, large and small, around the country.  Strangely, it was a local bank in Rockford, IL that refused the agreement.  I recall a lot of local press about that bank and even the bank CEO cited his own reasons for not signing on, mostly calling it a business decision for the bank depositors.  Interestingly, the amount owed was not the millions you might expect to be hanging in the balance.  It was, as I recall, only a few hundred thousand dollars.  In the end it was reported that the bank did finally agree but only as a result of death threats being made toward the bank employees.  Iacocca said it wasn’t his people, but it’s a strong Auto Workers area and it doesn’t take much imagination to presume the threats came from someone in the workforce whose job was hanging in the balance, union member or not.

In the years since those heady days I’ve developed a “better” understanding (“better” being a relative term, I know) for the need to bailout certain businesses or industries, essentially for one or both of the following reasons:  1. The sheer numbers of employees that might be turned loose into the unemployment rolls would strain local or state job hunting programs… and even state and federal unemployment benefits coffers.  2.  Allowing the demise of a large corporation or industry could create a strategic disadvantage to the overall security of the country… or cause an economic crisis or disruption of critical services (like air travel or rail travel… which itself was bailed out before Chrysler).

Whenever there’s talk about bailouts, like the recent Wall Street bailout, there’s always the public outcry about the little guy never geting a bailout but the large corporations do, with their executive inflated salaries and perks, and high profits.  The little guy is stuck with a foreclosed home and mounting personal debt because of a work layoff.  Whether you might believe in any of that the fact does remain that the recipients of those billions do in fact spend money and that in itself helps the economy… and helps to create jobs.  The short side to this is that the little guy loosing his home needs the money now to keep a roof over his head.  He doesn’t have a lot of time to wait for the trickle down effect of all those billions being spent across the economic strata.  But maybe that’s the collateral damage we have to live with in order to recover.  Maybe the little guy should have thought more about his ability to repay a cute and creative home loan that would not stand the test of time.. in favor of somehow focusing on his right to own a piece of the American dream simply because this is what you are supposed to want in America.  Maybe we should be monitoring with greater scrutiny the conduct of Wall Street traders so all this mess doesn’t happen again.  Maybe all this is everyone’s fault.  I know…. kinda hard to swallow that concept when your home is gone, your job is gone, and you have a family of four to feed. 

Personally I feel people in this country confuse the idea that this is the land of opportunity… not the “land of guarantees”.  I am an American and I am only entitled to achive that in which I might struggle to obtain and hold on to during good and bad times.  If the rules of play are fair and equitable, which we presume is what makes up our Constitution and Bill of Rights, then my success (or not) is based soley on the limits of my own perserverence.  Generally speaking, these big bailouts make sense because they help to maintain an economic status quo; not causing crisis that can affect social order. 

Yeah, there’s going to be boondoggles like that 500 million to Solantra.  Which only means we need to monitor the process that grants these bailouts.  In the meantime, that money is not “lost” simply because the company folded, whether it went to paying the bills or paying extravagant salaries.  Whoever received the money, business or personally, had to pay taxes on it as income.  They had to spend it in other areas that stimulates job growth and the economy whether someone purchased a new car or a pack of razor blades.  Of course that’s not a way to run a bailout program… so we fix it for the next time and move on.

Iacoca is quoted below back in 2009 regarding the auto industry bailout… you can sense that getting a so-called “free ride” bailout is not something corporations want.. and that’s the way it should be.

June 22, 2009″Their oversight is just too extreme. That’s why our 10-year loan, we paid it back in three years. We couldn’t stand the government. The bureaucracy kills you.”

LEE IACOCCA, former Chrysler CEO, urging Chrysler and General Motors to pay off their federal loans as quickly as possible to avoid government interference. 

The postscript… the auto industry bailout has been paid back as has most of the other Wall Street loans.  Seems to me like the bail outs did their job.


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