The+cons+of+the+bailout+ashleykim

"The bailout is the worst idea  ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,, since reality tv shows" - Annonymous



**Who opposes the bailout?**

Majority of the tax payers, a few financial institutions, some economists.

**Why do they oppose the bailout?** 
 * 1) ****


 * They say**: 
 * By allowing the companies that made mistakes and thus got themselves and the economy into this state, to survive, we are essentially rewarding bad behavior.
 * Despite the fact that Wall Street made a huge mistake by allowing mortgage backed securities to happen without looking at the long run, the government is simply fixing the mistake and Wall Street is given very minimal penalty
 * They are doing this with taxpayer money, and tax payers have already suffered losses (MBS investments)


 * The other side says**:
 * What does it matter if it is not the most morally comfortable when the economy is in the state that it is in right now?
 * Rather than focusing on morality we should be focusing on how to revive the economy, and the bailout is the best way of doing that

Despite the fact that it makes us feel uncomfortable, a 'moral hazard' would not detrimentally affect the economy.
 * Strength of the argumen**t: **3/10**



2. ****


 * They say**:
 * The majority of the world's economically developed countries are market economies
 * A market economy is an economy in which there is very limited government intervention because of the principal that the economy is able to regulate itself: the consumers will regulate the market
 * [|Consumer sovereignty]
 * The US is the most frequently cited example of a market economy
 * The principal behind the market economy is competition, and for there to be competition the businesses that make bad decisions must fail so that only the businesses that make prudent decisions for the market can succeed
 * When the government allows the companies that make bad decisions to succeed by giving them financial aid they are changing the rules of the game and thus giving no incentive to win it
 * It is shown that the market economy is the most effective manner of managing the economy
 * As you can see [|here], the countries with the most economic freedom are also the countries that are recognized in the world as developed countries such as the US, Canada, Denmark, England, etc.
 * Furthermore when they bailout the companies the government also gets the right to set restrictions on the company and regulate the input and output of the company to a certain degree

__Example__: Clayton Homes is a mortgage lending company which did not lend to subprime borrowers and which had a pristine credit record. They were not affected by the economic crisis but what they were affected by was the bailout. The bailout meant that other companies that made mistakes were allowed to survive, and so to get started and attract customers again they lowered their prices (based on the money the government gave them). This meant that due to the bailout good companies like Clayton homes lost 30% of their customers. (Carney, John "Warren Buffet explains why the Bailout is crushing healthy companies")
 * Government intervention completely changed the market economy: in a market economy Clayton homes would be thriving, yet due to government intervention they are actually struggling and have lost 30% of their customers.
 * The Government has completely changed the fundamentals of the market economy


 * The other side says**:
 * No country is a complete market economy either, since if you look [|here] it does not have complete economic freedom

The market economy clearly is not only an ideal but it is something which is needed for a healthy economy, yet government intervention is clearly going against everything that the market economy stands for, and the bailout not only violates economic freedom a bit as it has done in the past, but actually acts as complete government intervention because it changed the future that would have happened had market economy been allowed to run its course. Furthermore, see that government intervention in how a business is run does not help the business at all in the market economy - if you look at GM, you can see that the government cannot properly regulate businesses because they are not a natural part of the market economy (Daniel) Note: not using blogged material from this source but the statistics that it has.
 * Strength of the argumen**t: **10/10**

3. ****


 * They say**:
 * Even though it would help alleviate the economic recession to a certain degree, it is not a miracle solution in the short run either
 * Bailing out the banks would not address the root of the reason as to why we are in a financial downturn
 * The reason we are in this situation is that the housing bubble burst but the bailout of the investment banks will not address this
 * Housing prices will keep falling and foreclosures and defaults will keep on occurring


 * The other side says**:
 * What solution could solve all of the causes of the crisis?
 * The the bailout is the best solution that we have, and in fact it will help the economy a lot in the short run, even if it does not do any of those things, since it will help prevent the possibility of events such as:
 * Bank Runs
 * Everyone rushing to the bank to get their money out
 * A problem because the bank does not actually have all of that money
 * A reoccurrence of the Great Depression
 * Mass unemployment

Okay, so even though it will not solve all the problems that caused this economic crisis, obviously it will alleviate the recession a lot and stop the economy from repeating history and plunging into the Great Depression, which is a good thing. There is no way we can directly solve the problem of the burst of the housing bubble since we cannot distribute enough money to everyone who 'claims' to be in crisis - nor would this be the proper manner to react to such situation.
 * Strength of the argumen**t: **4/10**

4. ****


 * They say**:
 * Even though it is just not a miracle solution in the short term, it is very very detrimental in the long term due to two main reasons:
 * 1. Companies that got bailed out (i.e. the large companies that are necessary for economic recovery)
 * They will realize that they are invaluable to the government
 * This is extremely dangerous because they will grow to think that they can keep messing up and that the government will keep bailing them out and allowing them to survive
 * The government has shown that it thinks that the bankruptcy of these companies will impact the economy too greatly
 * They will continue to take risks and make decisions that may culminate in yet another bubble
 * Companies consequentially do not take the bailout seriously because they can see that the government will not allow them to fail
 * See example
 * 2. Other companies will learn from their example
 * They will see that to the government market share seems to be more important than quality and reliability of the company
 * Mentality that as long as you have a large market share you will become 'immune'
 * Fine to take big risks in the market and make decisions that may be very dangerous in the long run as long as it integrates you into the market with a big consumer base
 * Either that or they will become increasingly inefficient since they can see that the rules of the market economy do not apply to everyone - and that certain institutions do not have to play by the same rules
 * Eliminates incentive to win
 * Whilst playing a game if some people are just allowed to win even after they fail, which should mean that they lose, would you want to carry on playing?
 * So in the long term it will make companies less efficient, and large companies will make more and more mistakes like this because of the precedent that has been set this time saying that because the banks are so important to the economy that saving them is more important than preserving the market economy

An example of companies not taking the bailout seriously: AIG, which got a bailout without which the company would have gone bankrupt, paid its few high flying executives (CEOs etc) a combined total of 160,000,000 dollars (160 MILLION). This is more money than they were given before the bailout. After they got approval for the bailout, the very next day AIG sent a handful of its executives on a hunting and golf trip. On a private plane. (Mahoney,Tim "AIG Executives busted for spending 90K on a private plane!")




 * The other side says**:
 * The government will actually restrict the companies to a certain degree so that they cannot make very bad decisions
 * The companies will probably think that the government is only bailing them out since there are so many of them and because it is in the middle of a "crisis" - they would know that if they were by themselves that the government probably wouldn't bail them out

We can see from this that the bailout is going to mess with the fundamentals of the market economy, which is going to ruin the economy in the long term since their will be very little efficiency or motivation to succeed and a lot more risk taking that will culminate in bubbles (the housing bubble, the dot com bubble etc). Furthermore, the companies only have to look at the bailout of GM motors to see that the government actually will bail out single companies if they have a large enough market share.
 * Strength of the argumen**t: <span style="color: rgb(0, 128, 0);">**10/10**



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