A proper term for these economic times
October 1, 2008 · 2:04 PM
I find it unfortunate that the media keeps using the term “bailout” to describe the actions being taken to mitigate the current financial crises. I’m sure that as a result of this terminology, most people would describe what is going on as: “The government is taking our tax money to offset the financial reversals of a bunch of mismanaged companies, without any chance of seeing those funds returned.” The term bailout has exactly that connotation.
In reality, all the financial transactions have very strong requirements and stipulations that provide the opportunity for the government to recoup its “investment,” and possibly even make a substantial profit. Interest rates associated with loans are outlandishly high, and equity positions are being taken by the government at a cost that is well below their possible recovery value in the future.
These somewhat draconian requirements are highly justified however, since the entire rescue operation is taken at significant risk. Nevertheless, the government is in a unique position as being the only agency that has the resources to take on that risk and possibly enjoy the rewards.
The contentious “Chrysler Bailout” that took place in 1979 ended up yielding exactly these kinds of rewards. As a key part of the Chrysler rescue, the government received “warrants” — essentially, stock options — that gave taxpayers a healthy payoff once Chrysler recovered. No money was ever lost and a substantial profit was actually realized. The taxpayer made out but, granted, at a risk.
The biggest losers will be those associated with the organizations in trouble, both as investors and employees. Holders of common stock will be wiped out as is appropriate since they were investing for a future return, but basically miscalculated. Saddest of all are the lower level employees who were not part of the policy setting process but are victims of the bad decisions made by top management. My hope is that the individual architects of the disaster get their due, but this is yet to be seen.
Let’s term the process that is taking place for what it is: “A government injection of liquidity into a situation that is in danger of going into a death spiral that would have horrible consequences for us all, but with constraints and requirements that allow for the taxpayer to possibly come out ahead and certainly better than the worst case scenarios being bandied about.”
San Juan Island