Imagine this scenario: I am a voracious spender, some would say reckless. I rack up tons of debt buying Jimmy Choo shoes (a good investment, I’d say), new furnishings for my house and iTunes. When I reach my limit, I panic. My friends panic. My family panics. But all is well when I get a phone call from the feds promising to give me the money to pay off my debts if they can occasionally borrow the shoes.
Sounds a little ridiculous right?
Not so much. The Federal Reserve yesterday agreed to give ailing insurance company American International Group, Inc. an $85 billion boost to help it climb out of trouble. In exchange, the government now owns a piece (though no one is saying how much) of the company.
Must be nice.
Yeah, I get that there are some differences between my hypo and AIG… For one, I don’t think the company owns any Jimmy Choos. And I realize that I don’t hire thousands of people that rely on me to remain economically stable (just a handful) nor do large companies look to me to provide an economic benefit (except maybe Apple because we spend far too much money with them). Tens of thousands of investors don’t stand to lose money when I make bad decisions – not even tens of investors, just my husband. But you get my point.
The escalation of the housing crisis – brought on, many argue by an unrealistic and irresponsible borrowing spree to purchase real estate in high growth areas – has resulted in a series of events that are shaking down the US economy in a big way. While in a pure capitalist society, this would result in a “wait and see” pattern, we don’t live in a pure capitalist society (really, don’t ever believe that we do for second). Our government regularly steps in to avert crisis or regulate financial markets. And lately, it’s being stepping in a lot.
How much is all of this economic protection costing taxpayers? A lot. Try $800 billion a lot. Exactly where is all of that cash pouring from the feds to the private sector going? Here you go:
- As reported earlier, $200 billion has been pledged to save Freddie Mac and Fannie Mae.
- As reported above, $85 billion will be doled out to AIG.
- The Federal Housing Administration has guaranteed an additional $102 billion in mortgages for 2007.
- The Federal Reserve’s “special” lending facilities have loaned an additional $400 billion to struggling banks.
- A whopping $29 billion was used as a guarantee to insure JP Morgan Chase’s purchase of Bear Stearns.
A bit sobering, isn’t it? In an economy already operating at a deficit, the government continues to hand out tax dollars as if they are candy: Here, take some, we’ll make more.
Don’t get me wrong. I’m actually not opposed to the government stepping in to avert a bigger financial crisis. I do, however, wonder about the economics of these transactions. Did the CEOs and other board members of these struggling companies make any sacrifices? Did they take any pay cuts? Were any real efforts made to save these companies before asking for corporate welfare? I don’t know. What I do know is that in 2006, the CEO of AIG was paid $26 million in salary and bonus; in 2007, he received an additional $14 (source) – $40 million in two years that I am fairly certain he won’t offer to return to the company after apparently running it into the ground. The CEOs of Bear Stearns, Lehman and Countrywide also sit atop the leader boards in pay, earning hundreds of millions of dollars (source). In the meantime, many Americans are working to meet their own existing obligations with no assistance from the government. Maybe it’s not so much bail out that’s needed as for these companies as accountability…