Government bailouts of private industry
Government bailouts of private industry refer to instances where the U.S. government provides financial assistance to struggling companies or entire sectors to prevent severe economic downturns. These interventions are often implemented during broader economic crises, as the failure of major corporations could have catastrophic ripple effects on the economy. Public opinion on bailouts can be divided, primarily due to concerns over the use of taxpayer funds for such costly measures.
Historically, government bailouts date back to the early days of the United States, with significant interventions occurring during events like the Panic of 1792 and the Great Depression. In the 21st century, notable bailouts include the airline industry post-September 11 attacks, the financial sector during the 2008 housing crisis, and the automotive industry, which faced challenges due to financial mismanagement and economic downturns. These interventions aim to stabilize the economy by protecting jobs and maintaining critical industries, although they can also provoke debate regarding their fairness and long-term effectiveness.
Government bailouts of private industry
Government bailouts of private industries are solutions for economic crises in which the U.S. government extends financial relief to companies or sometimes entire industries that are on the brink of economic failure. In most cases, such bailouts are provided in times of broader economic distress when the failure of large corporate entities could potentially be catastrophic for the nation at large. Public reaction to high-profile government bailouts is often mixed, primarily because these expensive transactions are typically completed with taxpayer funds. Regardless, the federal government has turned to the bailout to avert financial crises on numerous occasions in American history.
Historical Bailouts
The use of government bailouts as a strategy for preventing catastrophic economic failure dates back to the United States' earliest days as an independent republic. In late 1791, the new federal government assumed $18 million in states' debt. Shortly after, financial speculators began buying cheap government bonds as quickly as they could. Within months, the market for these bonds failed and their price plummeted, sending the nation into a crisis called the Panic of 1792. To save the American economy from disaster, Treasury Secretary Alexander Hamilton came up with an ambitious plan that had the government borrow money from struggling banks to buy back the failing bonds. In doing so, the government restored the bonds' value and saved the country from a potentially fatal economic disaster.
Another crisis requiring government intervention occurred in 1907 (called the Panic of 1907), when banks and trusts provided loans to fund an effort to corner the market on a certain copper company. The scheme failed and the financial institutions involved went into a tailspin. In a desperate attempt to remedy the situation, the government gave the banking industry millions of dollars. When even that failed to fully reverse the downfall, banking tycoon J.P. Morgan had to step in alongside the government and convince New York bankers to form a joint pool of capital to pay depositors at failing banks and relieve the crisis.
The federal government turned to the bailout again during the Great Depression of the 1930s. During the crisis, the housing market collapsed and thousands of Americans were losing their homes to foreclosure. To reverse this trend and keep people in their homes, President Franklin D. Roosevelt and Congress created an agency called the Home Owners' Loan Corporation. Through this agency, the government bought and refinanced defaulted mortgages, ultimately keeping 80 percent of borrowers in their homes and making a small profit in the process.
In the late 1980s and early 1990s, the unregulated savings-and-loan industry bottomed out after interest rates rose and compromised profits. By 1995, half the S&Ls operating nationwide had been forced out of business. In response, the government organized the Resolution Trust Corporation to stabilize the situation and clean up the surviving S&Ls. In total, the effort cost taxpayers about $124 billion.
Twenty-First Century Bailouts
On several occasions in the twenty-first century, the federal government has stepped in and financially rescued failing businesses. While the largest and most significant of these bailouts were extended to corporations in the financial sector, businesses in a number of other industries also benefited from government intervention.
The first noteworthy bailout of the twenty-first century came in 2001, when sluggish business and the effects of the September 11 terrorist attacks left the airline industry floundering on the brink of failure. Hoping to prevent an industry-wide collapse, the federal government put together a $15 billion financial package that stabilized the air travel business, kept almost all the struggling airlines in operation, and eventually led to a $140 million profit.
The airline bailout was only the beginning, however. By 2008, the American economy was in distress because of the collapse of the subprime loan business, which is centered on the issuance of loans to people with poor credit or no credit at all. As a result of less than reputable standards and practices, several major financial services firms found themselves heading for bankruptcy. Fearing that the economic consequences of allowing these huge businesses to fail could be potentially catastrophic, the government took action. To begin, the Treasury lent JPMorgan Chase $29 million to purchase Bear Stearns, one of the struggling firms, in April of 2008. That summer, the government again stepped in to bail out mortgage companies Freddie Mac and Fannie Mae, giving each company $100 billion to begin the rebuilding process. Finally, in September, the government was forced to assume control of American International Group (AIG), a large insurance firm. In the end, the government had to agree to loan AIG up to $85 billion to prevent its failure.
The broader economic problems caused by the near-collapse of the financial sector soon led to struggles in other industries as well, including the automotive industries. As a result of the ongoing economic downturn and its own internal shortcomings, the American automotive industry found itself in dire financial straits by the end of 2008. Specifically, the so-called Big Three, General Motors Company (GM), Ford Motor Company, and Chrysler Group LLC, were nearing bankruptcy. Rather than allowing these massive companies to fail and permitting tens of thousands of people to lose their jobs, the government decided to offer bailouts. While Ford declined the offer, GM and Chrysler received near $60 billion from the U.S. Treasury. Though the automaker bailout was generally unpopular with taxpayers, it ultimately saved three of America's biggest businesses, potentially prevented an even worse economic meltdown.
Bibliography
Batten, Donna, ed. "Economic Bailout." In Gale Encyclopedia of American Law. Vol. 4. Detroit: Gale, 2010. Print.
Beech, Eric. "U.S. Government Says It Lost $11.2 Billion on GM Bailout." Reuters. Thomson Reuters. 30 Apr. 2014. Web. 25 Nov. 2014. <http://www.reuters.com/article/2014/04/30/us-autos-gm-treasury-idUSBREA3T0MR20140430>
Davis, Marc. "Top 6 U.S. Government Financial Bailouts." Investopedia. Investopedia, LLC. Web. 25 Nov. 2014. <http://www.investopedia.com/articles/economics/08/government-financial-bailout.asp>
Ferrara, Miranda H. and Michele P. LaMeau, eds. "U.S. Automaker Bailouts, 2009." In Corporate Disasters: What Went Wrong and Why. Detroit: Gale, 2012. Print.
Phillips, Michael M. "Government Bailouts: A U.S. Tradition Dating to Hamilton." Wall Street Journal Online. Dow Jones & Company Inc. 20 Sep. 2008. Web. 25 Nov. 2014. <http://online.wsj.com/articles/SB122186662036058787>