Governments habitually bail out enterprises deemed too important to fail. Are taxpayers better or worse off?
Unfortunately, we can't say definitively because we only observe the world under the policy that was adopted, not under the opposite policy.
That doesn't mean we can't make some educated guesses. We made some money on the 1979 Chrysler bailout but lost a net $132 b. on the S&L bailout of the late 1980s. There would have been a lot of jobs and income lost if we hadn't acted then, but it's hard to say how much. On balance, we're probably better off, but it's impossible to prove.
Last Sunday, Treasury Secretary Hank Paulson proposed to temporarily increase the present law $2.25 b. Treasury lines of credit for the Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, to allow Treasury to purchase GSE equities, and to establish a consultative role for the Fed in establishing GSE capital requirements.
A few days earlier, the markets had chopped off two-thirds of GSE equity value as rumors spread that their mortgage portfolios were in worse shape than expected.
Fannie Mae and Freddie Mac comprise an overwhelming share the secondary market for mortgages under the conforming loan limit, currently $417,000, but about to be raised to at least $550,000 or higher in the housing bill, H.R.3221, expected to pass Congress next week. Together, Fannie Mae and Freddie Mac have issued $5.3 trillion of debt to finance U.S. homes, a sizeable portion of which is held by overseas investors and central banks. Fannie Mae and Freddie Mac conducted 75.6% of total U.S. mortgage originations in the fourth quarter of 2007, so their demise would be a catastrophe for mortgage finance.
It should also be noted that Fannie Mae and Freddie Mac enjoy substantial direct and indirect government subsidies that were last estimated by the Congressional Budget Office to total $23 b. in 2003.
The ultimate cost to taxpayers of a GSE bailout will only be known when the last loan is paid off in years to come. The potential hit to the housing market and to the economy of not bailing the GSEs out probably exceeds the cost, but that's just a guess.
Using tax dollars to bail out companies - should be treated as a
Using tax dollars to bail out companies - should be treated as a loan
April 1980: After huge layoffs and losses in the millions, Chrysler barely averts bankruptcy by receiving $1.5 billion in government-backed aid.
August 1983: Chairman Lee Iacocca signs over a ceremonial check for $813,487,500 to pay off its last federally guaranteed loans.
Any bailout or any government funding of any business should be treated as a loan.
There should be no free ride to corporate America.
The tax payers’ dollars belongs to the citizens of our country.
If it is in the best interest of our country to help a financially destitute company, it should be done on the condition that those funds must be paid back with interest to the American government.
Jay Draiman
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