During the next 12 months, very large companies from such divergent industries as investment and commercial banking, automobile and airlines will seek significant help from the federal government to avert bankruptcy. Their executives argue that they are “too big to fail” because of their critical economic role.
Determining solutions will engender weighing conflicting advice on the cost benefits of remedial action. The beleaguered companies provide significant services, employ thousands and owe billions of dollars to both domestic and international creditors. Bailing out companies is not a free lunch, especially when the tab could exceed $250 billion.
How do we pay? The government can tax Americans. The Federal Reserve can print more money — a step that encourages further inflation. Inflation reduces real growth and undermines saving.
Adam Smith, the father of economics, criticized governments giving grants to private enterprises. Smith supported competition to provide most efficiently the needs of society.
Milton Friedman, one of the seminal economic thinkers of the 20 Century, was a libertarian. In his book “Capitalism and Freedom,” he advocated minimizing the role of government. Friedman promoted the marketplace to assure political and social freedom.
Irrespective of the directives of Smith and Friedman, the American economy has historically mixed private and public activities, relying upon layers of business regulations to protect the public good — with mixed success.
The Treasury Department on Sunday seized control of Fannie Mae and Freddie Mac and promised to provide as much capital as they need to stave off insolvency.
William Poole, the former chief executive officer of the Federal Reserve of St. Louis, pointed out the complexities of confronting the Fannie Mae and Freddie Mac crisis. In an article “Too Big to Fail, or to Survive,” Poole pointed out that “to permit the two mortgage giants to default would set off a worldwide crisis. But we can decide what should become of Freddie and Fannie after this crisis. The best option is one getting little mention in Washington: get rid of them.”
Poole said that instead of being regarded as “too big to fail, we should look at them as too big to liquidate quickly.”
Saving commercial and investment banks remains controversial because although their failures could cause an international financial crisis:
* Greed motivated their reckless borrowing to purchase risky investments such as subprime mortgages, junk bonds, credit default swaps and private equity deals.
* Wall Street has encouraged “profiteers” who after buying up local companies “sliced and diced” not only the companies but their loyal employees.
* Funding the bailouts will entail many billions of dollars.
Main Street also requires government largesse. The Big Three automobile firms and their suppliers are making noises about needing $50 billion in order to retool to make more fuel-efficient cars.
Critics point out that the Japanese automobile manufactures are facing exactly the same travails. Thus, in helping one set of automobile manufacturers are we unfairly discriminating against better run companies?
The proper role of government relative to the airline industry highlights that changing times and conditions warrant different responses. Specifically, in 1978 the Airline Deregulation Act:
* Removed governmental control over commercial aviation.
* Exposed passenger airline industry to market forces.
* Eliminated federal obligation to assure airlines a fair rate of return.
The legislation was initially remarkably successful, spawning many new airlines. Supporters of deregulation point out the success of discount carrier Southwest Airlines, our largest domestic carrier, which chartered a novel business model:
* Fly short, quick trips into secondary, less costly airports of major cities.
* Use primarily one aircraft type, Boeing 737.
* Provide employee profit sharing, the first in the airline industry.
Thirty years later, North American airlines could lose close to $5 billion in 2008 because of slowing passenger traffic growth and high fuel prices. The widespread bankruptcies of both traditional and upstart airlines undermined our initial optimism about whether deregulation has truly served “the public good.” Airlines have dropped thousands of flights, even leading to the closing of some 90 airports in small communities.
The complexities of modern life require a combination of private and public enterprise. Thus, government policy concomitant with bailouts should be coupled with the development of an exit strategy as circumstances warrant.
Historically, the genius of American business rests on the shoulders of upstarts such as Wal-Mart, Intel, Microsoft, and Google.
However, morality requires a social safety net.
