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| Summary: Should the government bailout banks and financial institutions? |
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Author:Steven Kryger ( Canada )
Steven is a senior at Yale University, and the Director of Membership for the Yale Debate Association. Steven attended St. John’s-Ravenscourt School in Winnipeg, Manitoba, Canada and was the Canadian High School Debate champion, along with the World Extemporaneous Speaking Champion. In college, he has reached elimination rounds at the North American Debate Championships and the World Debate Championships. |
Created: Friday, June 12, 2009
Last Modified:
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A decline in house prices that began in 2007 ballooned into the biggest global economic crisis since the Great Depression. Consumer spending has fallen, banks have severely restricted money lending, currencies are fluctuating wildly, and several large corporations teeter on the brink of bankruptcy, including insurance company AIG and several banks (Citigroup, Bank of America, HBOS, RBS, etc.).
Governments around the world have instituted or are considering bailouts of financial institutions – giving or lending corporations large amounts of money to prevent bankruptcy and to keep the company afloat. Often the government comes to own a large portion of the company as part of the terms of the bailout. These bailouts are huge in scope. In 2008 AIG, an insurance company, was given $40 billion dollars by the US federal government. The total cost of the largest US bailout, the Troubled Assets Relief Program (TARP), is $700 billion dollars. The 2008 Bank Rescue Package from the UK Government cost £500 billion. |
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| The government holds significant responsibility for the credit crisis. Firstly, the US government distorted the market to encourage poorer individuals to take out large mortgages and buy houses. When a few of these people (predictably) failed to pay off the mortgage, this began the chain of events that led to the crisis. Furthermore, governments around the world failed in their duty to regulate and oversee the banking industry. Since the government has responsibility for the crisis, the government should pay to support the companies affected by it. |
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Corporations are mostly responsible for the crisis. The decision to make risky investments came from the top of the company. While some governments did not sufficiently regulate those corporations, businesses are ultimately the decision makers and ultimately should pay for poor decisions they made, instead of having the government pay the price when those risky investments fail. |
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| Supporting the banks helps the rest of the economy. Financial institutions provide the loans that businesses need to open up, innovate, and invest. With the banks afraid of risk and lacking cash, banks have little capacity to loan. Without those loans, the pace of growth in the global economy slows substantially, and may even go into reverse. Furthermore, economic growth requires businesses and individuals to be confident enough in the economy to make investments. When the government shows that it is willing to support the economy, investors will have more confidence and economic growth increases. |
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There are long term economic consequences to the bailout. Financial institutions, recognizing that the government will support them if an investment loses money, will continue to make risky investments. This will lead to future crises and future bailouts. Only if the government allows companies to face the full cost of bad investments will companies in the future allocate their money in a smarter, more conservative way. |
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| Banks collapsing also hurts individual citizens. Many pension plans and retirement savings have money invested in financial stocks. Bankruptcy destroys those investments, meaning less money for pensioners and retirees. In such circumstances, the government should step in to ensure the survival of major financial institutions. |
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A natural part of the economy is the flow of money from unsuccessful companies to more successful companies. By taxing successful companies to pay for bailing out others that clearly do not have a good business model, the government is punishing those companies that made smart investment and good business decisions. Such signals discourage prudent business decisions in the future, and will result in the misallocation of capital within the economy, reducing future economic growth. |
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| The global economy is at risk of a much more severe collapse without an injection of government money. Without bailouts, bankruptcy of these institutions is likely, and that has the direct effect of putting at risk those assets that the bank manages. Mortgages, investments and savings that are insured and managed by banks are at risk of losing a substantial portion of their value, which would destroy significant amounts of global wealth. |
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The cost of the bailout is too high. $700 billion dollars is equivalent to about $2000 debt per American citizen. The cost per citizen in other parts of the world is even higher. All of this money is borrowed by the government, and for years to come, this generation and the next will be paying off that debt and its interest. This money could be otherwise used for programs that make a real, tangible difference on people’s lives, such as healthcare and education. |
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| Governments are not just giving financial institutions the money. Instead, they are generally exchanging the money for shares in the company. This has two positive effects. Firstly, the government as a shareholder and partial-owner can direct the company to act in the interests of the nation, and to avoid overly risky investments. Secondly, in future the government can sell those shares and recover some (potentially all) of the costs of the bailout. |
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Government owning large parts of businesses is bad for the economy. By adopting socialist economic policies, the government will be tempted to force the company to make decisions that might please voters in the short run, but in the long run are inefficient and bad for the economy (for example, subsidising uneconomic industries). It also centralizes greater economic power in the government that can later be abused by corrupt or inept government officials. |
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| | This house would bailout banks
This house believes that TARP was a good use of government resources
This house supports government intervention to support failing financial institutions
This house would prop up banks
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| View the full discussion |
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CCox2716
Member
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Posted: Sat Jul 25, 2009 11:16 am |
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I have to agree. The little, "Mom & Pop" shops aren't getting any of the bailout. If they fail, the larger corporations buy them out, or they go under. The government does not help them survive.
Stop putting our economy further in debt!!!!!
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Stevensondebate
Member
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Posted: Wed Jun 17, 2009 09:00 pm |
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| i cannot understand why people are for the bailouts. in my opinion, they simply pay my money to businesses who tried and failed. They pay the money to the businesses to keep up the exact same failing plan that sent them to the government for help in the first place. When we say that businesses are to big to fail, we have stopped being a capitalistic society, which is based on the middle class. We are helping out the rich, not the middle class with the bailouts.
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Debatabase
Member
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Posted: Fri Jun 12, 2009 03:05 am |
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Author:
Created: Friday, June 12, 2009
View Topic
A decline in house prices that began in 2007 ballooned into the biggest global economic crisis since the Great Depression. Consumer spending has fallen, banks have severely restricted money lending, currencies are fluctuating wildly, and several large corporations teeter on the brink of bankruptcy, including insurance company AIG and several banks (Citigroup, Bank of America, HBOS, RBS, etc.).
Governments around the world have instituted or are considering bailouts of financial institutions – giving or lending corporations large amounts of money to prevent bankruptcy and to keep the company afloat. Often the government comes to own a large portion of the company as part of the terms of the bailout. These bailouts are huge in scope. In 2008 AIG, an insurance company, was given $40 billion dollars by the US federal government. The total cost of the largest US bailout, the Troubled Assets Relief Program (TARP), is $700 billion dollars. The 2008 Bank Rescue Package from the UK Government cost £500 billion.
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