Bailout Basics

The federal bailout movement has always had one clear goal in mind: confidence must be restored in the banking system in order to nurture lending practices once more, eventually loosening the clenched fist of credit, which has been choking businesses and homeowners alike. This plan sounds quite logical, and the goal is certainly noble, but will we get the results we intended? The answer requires a few steps backward along the timeline of the financial crisis and TARP action.

The origins of the financial meltdown are rooted in failed loans. Mortgages and other large debts were offered to ‘risky’ individuals and business with few questions, on the basis that real estate values would rise indefinitely, and consequently, collateral would multiply. Loans flowed freely for the entirety of this boom. Once real estate began falling, many people realized that it was in their best interest to default on their loan, because they were paying more than the property was worth, and banks were left with low-valued real estate worth far less than the original loan. Thus, both banks and loan-accepters lose, and the downward spiral begins.

Now, let’s fast-forward a couple years. The federal government is handing banks money to spur lending practices, intending to give people money to rebuild their lives and businesses. Most people fail to take note, however, of the new recipients of such loans. The people most in need of bank credit are: those who cannot afford their homes, the unemployed, new business ventures, and those who were not able to ride out the crisis on their own savings. In other words, these are people who are at risk of failing to make proper payment, and who should have been denied a loan in the first place. Before this fiasco, banks were motivated by profits to lend to as many people as possible, regardless of risk, in order to pad their balance sheets. Now, banks are motivated by the GOVERNMENT to lend as much as possible to risky individuals, in order to prove to the public that the $45 billion in taxpayer money is being put to use. Are we likely to see a similar situation in the not-so-distant future? This seems like an awfully large oversight, especially when we should have learned from such a mistake the first time.

Buy American

A major component of the original bailout plan proposed by the administration was a “Buy American” clause, requiring all money spent on domestic construction projects and employment to be paid only to American companies, though luckily much of this component has been edited out. It is true that seeing 11.6 million people unemployed in our country is certainly nothing to gloss over. Having paying jobs in the United States is imperative to the health of our nation. However, we no longer live in a world where an American company is only operated in America with only American suppliers and only American consumers. Is a Ford factory in Japan considered more American than the Honda factory in Ohio that employs thousands of U.S. workers? Boeing, which is the largest American airplane maker, receives input parts from Turkey, South Africa, Romania, Japan, Korea, China, and many other countries, merely to build one plane. Thus, it is evident that we are part of a global economy, and can no more easily define “buying American” as we can perform such a feat. In addition to its unfeasibility, such a plan hearkens back to protectionism and isolationism, which has historically hindered closed-off countries, such as China, and could very well spark a trade war. Decreasing international trade has never aided a country’s growth, and is unlikely to be a solution for boosting U.S. employment. Trying to enforce such an ideal at this pivotal point in our economic restructuring has the potential to tear the United States down from its high level of prominence in the realm of global trade.