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When Will The Bailouts End?

September 18, 2008 | Filed in: Miscellaneous | 3 comments

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Maybe it’s just me, but these bailouts seem to be happening more and more frequently these days. Six months ago it was Bear Stearns. Just two weeks ago we bailed out Fannie Mae and Freddie Mac. Now, as you’ve undoubtedly heard, the U.S. government has taken it upon itself to bail out American International Group, otherwise known as AIG. What was their reasoning this time around? What does this mean to us as taxpayers? Will the bailouts ever end? These are all questions that you have probably found yourself asking. I’d like to attempt to answer them for you.

Why Did We Bailout An Insurance Company?

To be fair AIG is involved in more than just insurance.  That is, however, their primary business.  Unfortunately they have had large levels of exposure to the credit crisis through an insurance-like product that protects the purchasers of the product from bond defaults.  Essentially they insured investments.  As so many of these investments are going south so is the cash of AIG as they are forced to pay out to their customers.  The problem lies therefore with their current level of capital.  They were unable to raise enough in time and their credit ratings were dropped.  This may have forced them to declare bankruptcy because they did not have enough cash coming in.  The fed stopped this though by offering an $85 billion dollar loan and agreed to taking an 80% stake in the company.  Essentially they just bought AIG.

Will This Affect Our Taxes?

More than likely this will not have an impact on our taxes.  But it may.  There’s something that a lot of American’s don’t know about the Fed and our government.  They have been running a budget deficit for a LONG time.  That much is common knowledge.  But think about it.  Where did they get the $85 billion to loan to AIG?  It wasn’t sitting in a vault somewhere twiddling its thumbs.  That much is for sure.  No.  When the government needs money they print it.  Just out of thin air.  They fire up the money machine and call it cash.  Of course if I tried to do this I’d be arrested for counterfeiting.  They ought to be arrested for causing high inflation.

So rest assured this money did not come from our taxes.  It may not either.  If AIG can pull through this ok the Fed hopes to sell their portion of the company back to the general public, at a gain.  But that doesn’t help the damage that’s already been done.  The fact is that the Fed and the treasury have thrown billions upon billions of dollars into the economy.  Dollars that didn’t exist before.  Is it any wonder why gas costs so much?  It shouldn’t be.

When Will The Bailouts End?

I’ll be perfectly honest with you.  I was surprised when the Fed let Lehman file bankruptcy.  I was pleasantly surprised in fact.  Don’t get me wrong.  I feel terrible that such a large business with so many employees was allowed to fail.  But it has to happen.  We are supposed to have a free market system.  There will be ups and there will be downs.  Right now we’re facing some serious crisis’ on wall street and in the financial system as a whole.  Things will eventually get better, but in the meantime there will be pain and there will be losses.

Right now WaMu looks like it may be the next target for failure.  They’re currently shopping themselves around for a buyer.  Their problem is also a lack of capital.  Cash truly is king.  Like I’ve been telling all of you, make sure you have an emergency fund for when a crisis comes into your personal life.

On that note I don’t think we’ve seen the last of the bailouts.  The Fed and the Treasury department have been too forgiving and too quick to pull the trigger.  These companies more or less deserved what was coming to them.  I hope that these bailouts will not create an attitude of “we can’t fail” in companies.  I hope that our country will be stronger after this crisis.  Unfortunately it’s looking to be quite the opposite.

What are your thoughts?

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Tags: AIG, Bailout Nation, Bear Stearns, Debt, Economy, Fannie Mae, Federal Reserve, Freddie Mac, Rants

3 Responses to “When Will The Bailouts End?”

1. 

   Rogue Says:

   
   

   I am not AMerican but business-wise, I think there are agreements that the regular public just do not have the opportunity to look into.

   In my opinion, there are stakes in these bailouts and would nt you be happy if your government would have better control on man companies? Or will have heavy interests upon them? Or may even make them public or government owned?

   Rogues last blog post..The WebbieStuffs EntreCard Business Now Opens!

   September 18th, 2008 at 6:17 pm
2. 

   Joseph Says:

   
   

   Rogue,

   Being a big believer in free markets and letting the system run itself I have to answer your question with a no. I would not be happy with the government having more control of industries or companies. I prefer the companies to be owned by individuals, investors and the people rather than the government.

   In other words, I don’t approve of the government owning any companies in most (if not all) industries.

   September 18th, 2008 at 8:38 pm

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