The news this morning indicates that AIG, one of the companies that started the bailout mania, is asking for $30B more in government aid, and the Obama administration seems inclined to provide it. Both GM and Chrysler have indicated that they need more, but have a less enthusiastic response for now. Citigroup is being infused with even more government money, and Fannie and Freddie just got another $400B. All of these ‘pop ups’ seem to indicate a serious failure of the initial strategy.
Who is the financial equivalent to General Petreus to suggest an alternative approach?
While we’re at it, what’s the exit strategy for the bailouts? When will we know when to stop?
During the Iraq war, the Bush administration was criticized for lack of an ‘exit strategy’, even though the President had clearly indicated that the US would remain only as long as the new Iraqi government asked us to, and that would happen when they were able to defend themselves and return stability to the country.
So now it’s President Obama’s turn. What’s the basis for saying “mission accomplished?” I haven’t heard one yet other than the mindless mantra about ‘saving jobs.’ For the thousands already laid off from Citigroup, Lehman Brothers and other financial firms, that is meaningless. Ditto for the thousands of jobs lost in Michigan that Senator McCain rightfully explained ‘were not coming back,’ for which he was heavily criticized.
The main dilemma is that government action will always tend to prolong crises, not solve them. The main reason for this is that in order for government programs to continue, there must still be something to solve or ‘manage.’ Solving the crisis removes the need for the government involvement. Ronald Reagan had a great quote about ‘the closest thing to eternity we will see on earth is a government program.’
In contrast, private companies that respond to crises are rewarded on the basis of ending the crisis. Companies that respond to oil spills, chemical hazards and the like are paid when the damage is controlled and eliminated. The company that restored the collapsed bridge in the midwest was paid to build the bridge as quickly as possible, and it beat even that aggressive schedule.
Government agencies in contrast, tend to establish 5 year plans to prioritize and manage the issue, solving it over a much longer term. This is what will happen to the bailout; banks will not be judged ‘healthy’ until the political leadership sees no further point in action, rather than using some traditional method of assessing the banks’ health.
Look at the way the Katrina recovery effort has progressed to get an idea of a government led rescue of an economy. Four years later, the federal government is still spending large sums of money–because there is always something that ‘should be done.’ The National Guard just this past week finally withdrew from the area. Unfortunately, the job is not done, if by ‘done’ we mean all the lives affected by Katrina being restored to pre-Katrina status. In truth, many can never be fully restored because of the losses they suffered.
The same is true of the bailouts and financial meltdown. We will be told that years of federal involvement are needed to manage the crisis. If we allow this, history will repeat itself and we will suffer a lost decade like the 1930s in the US or the 1990s in Japan. This is not a good idea.