Insights & Advice


The $750 Billion Bail Out Fund: The Line Forms at the Rear

They call it “TARP” for Troubled Assets Relief Program and it was intended to rescue banks buried under a mountain of toxic sub prime mortgage paper. But a funny thing has happened in the meantime. It appears the money is going to everything but buying up toxic paper.

Over $250 billion of TARP has been ear marked to buy stakes in our nation’s banks with over $100 billion already invested in preferred shares of several money center banks. These banks are using it for acquisitions, bonuses, and whatever else they want. Since then banks of every size, shape and shade are lining up to get in on the action.

In the meantime, the insurance industry has also decided it needs to be rescued. Leading the pack is the American International Group (AIG). The troubled insurer insisted it needed more than the original $123 billion the U.S. Treasury offered last month and over the weekend managed to wrest an extra $27 billion of taxpayer money from the government at much less stringent terms. Rumors swirl that other huge insurance companies are also petitioning the government for assistance. And the government lifeline seems to be reaching out to more and more industries.

General Electric’s capital subsidiary, which is the largest non-bank financial corporation in the country, has also been mentioned as a possible candidate for TARP’s largesse. But it is the country’s auto industry that appears to be next in line for bail-out money. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid formally asked Treasury Secretary Paulson to provide “temporary” assistance to the Big Three over the weekend.

To date, Congress has already agreed to $25 billion in loans to help Detroit meet future fuel-economy standards but the auto companies might need twice that number to stay afloat. General Motors said last week that it may not have the money to stay in business for another year without help. President-elect Barak Obama has publicly stated he backs a bail-out of some sort. However, the Bush White House is starting to balk at further requests as more and more companies line-up for a hand out.

Balk, they may, but I’m afraid we have little choice at this point. The evidence clearly indicates that if the government had stepped aside and allowed more banks to fail earlier this year the financial crisis would have been far worse, the markets a good deal lower and the economy, well, it could have been 1929 all over again.

We could stand back now and let the Big Three auto makers fail. The ‘survival of the fittest’ mentality would dictate these companies be moved aside for smarter, more efficient firms which also happen to be foreign companies. After all, it was that American, short-sighted approach in manufacturing gas-guzzlers in the face of increasing energy costs that dealt them a death blow, wasn’t it? Or maybe it was NAFTA, as so many blue color workers claimed, that shipped more and more of our manufacturing capacity south of the border.

“So let them fail and free market capitalism prevail,” say those foes of government handouts.

The problem with that attitude is that the auto industry and all its ancillary businesses account for about 3 million jobs in this country and it is also the backbone of what is left of manufacturing capacity in this country.

The unemployment rate so far in 2008 is 6.5 % (1.2 million jobs lost year to date). Are Americans willing to accept an additional 2.2% loss of the workforce for the sake of free market capitalism? Are we willing to lose our know-how in manufacturing?

We have opened this Pandora’s Box called TARP out of necessity and I suspect it is going to be extremely difficult to close it. Thanks to the triple threats of the credit crisis, sub-prime lending and a deepening global recession the United States government is being forced to do whatever it takes to rescue the country. As a result, I believe we may witness a large-scale transition over the next decade from a free market economy to something far more like European capitalism where the state has a much bigger say in how companies operate and run. Some of us are going to be happy about that. Others are not and will accuse us of selling out to socialism. Either way, it has already begun.

Posted in A Few Dollars More, Macroeconomics