Subsidizing failures has had success
July 15, 2008
No one should be at all surprised by the government's rescue package for Fannie Mae and Freddie Mac or the recent bailout of financial-industry giant Bear Stearns. These are just the latest examples of Uncle Sam's unending generosity in the form of subsidies and corporate welfare.
When my sister and I inherited a small family farm in Indiana from our mother, I was clueless about farm economics. One glance at the farm's balance sheet was a rude awakening.
I had no idea my mother had been on agricultural welfare for all those years. I didn't realize that, without the Department of Agriculture's annual subsidies for corn and soybeans, the farm would have just barely broken even.
The price tag on Uncle Sam's farm subsidies runs $20 billion per year spread across crops like sugar, cotton, wheat, sorghum, corn, soybeans and so on. It's all part of the federal government's elaborate network of large, accommodating safety nets that protect individuals and agribusinesses from failing.
Over the years, the government has rushed to the rescue of other entities. For example, when New York City was unable to pay its bills and teetering on the brink of bankruptcy, President Gerald Ford provided a $2.3 billion aid package to the city to address what were described as "seasonal needs" for cash.
The nation's largest city was simply "too big to fail." But, the bailout sent a disturbing message to urban governments about the need for fiscal discipline and self-restraint: You can spend irresponsibly and Uncle Sam will always be there for you, ready to bail you out.
Later in the same decade, with Chrysler spiraling toward bankruptcy, the government responded to corporate icon Lee Iacocca's urgent plea by issuing Chrysler $1.2 billion in loan guarantees. This bailout was a successful catalyst for Chrysler's rebound to profitability and the company paid off the $800 million balance of the loans in September 1983.
Against that backdrop of government largesse, the Federal Reserve's decision to extend a $300 billion line of credit to Fannie and Freddie on "discount" terms and the earlier $29 billion loan to facilitate the sale of Bear Stearns to J.P. Morgan Chase, should hardly come as a surprise.
The government's too-big-to-fail doctrine is premised on its ongoing fears of the dreaded domino effect. Failure of New York City could drag down into the financial abyss other struggling municipalities. Chrysler's collapse could put other Detroit automakers in jeopardy. Bear Stearns' failure could have sparked a disastrous complication in our financial markets. Fannie and Freddie's struggles could further delay recovery of the housing market.
Too big to fail, too small to survive are the bookends of federal welfare programs. Of course, one size does not fit all. The bailouts, subsidies and "earmarks" are all tailor-made, custom-fitted to every urgent need.
As Ronald Reagan famously proclaimed, "Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And, if it stops moving, subsidize it."
Thankfully, New York City, Chrysler, Bear Stearns (in its new form as J.P. Morgan Chase), and now Fannie and Freddie, are still moving, and farmers continue to produce record crops . . . with a lot of help from a good friend named Uncle Sam.
LINK:Subsidizing failures has had success -- chicagotribune.com
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