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July 26, 2009
Taxpayers' Dilemma
This essay was written in February 2009.
Enter John Thain’s luxurious office suite and you will marvel at his taste for lavish furniture and fine art. According to CNN contributing writer William Cohan, the former Merrill Lynch CEO invested over one million dollars last year in an upscale office renovation. His determination to redecorate his office is admirable, but also reveals a troubling issue. While Thain was busy perfecting his office and releasing billions of dollars in bonuses, the rest of his company was collapsing. At the same time, many other major financial institutions were filing for bankruptcy protection, consolidating, or pursuing government assistance. The United States government hastily implemented a bailout package worth 700 billion dollars to rescue the nation’s largest financial market participants, deemed “too big to let fail.” The sudden government intervention has enraged many citizens who understand the harsh reality: we hard working, average Americans will pay these 700 billion dollars through taxes.
You probably did not approve of or even know about the excessive compensation that Thain and other top administrators at financial services firms awarded themselves. Yet, you bear the accountability of the assistance-seeking millionaires who destroyed their own companies. This sad reality has fueled a nationwide debate on whether America should let companies fail or intervene at the expense of taxpayers who do not control the actions of lending institutions. A Los Angeles Times poll indicated that a majority of respondents opposed such bailouts (McManus). However, we Americans need our largest companies for vital activities including borrowing money from the local bank and trading in used cars. As the government’s primary source of revenue, we cannot overlook the tremendous adverse effect of letting them fail. A financial crash would exacerbate and prolong the current economic recession, affecting everyday Americans mainly by causing severe unemployment. To avoid this catastrophe, we must rescue our collapsing Fortune 500 companies. When rescuing these companies to restore our economy, the government should ensure they use the money properly. Upon granting funds, the government stringently examined the American automakers but inexplicably failed to hold financial institutions responsible, allowing the CEO of an investment bank seeking bankruptcy protection to sanction multimillion-dollar bonuses. For our hard-earned dollars to affect the economy, the government must subject recipients to unsympathetic guidelines and continuous monitoring.
Ordinary citizens seldom notice investing and lending activities, but the collapse of the financial industry would affect us individually. Without a bailout, we will struggle monetarily because of the industry’s prevalence and significance. Personally, the recession and ensuing financial crisis have affected my family and me. We purchased our house nearly 20 years ago for a seemingly great price and now cannot break even on a sale, forcing us to hold onto our largest investment. My family is trapped in an area where we feel uncomfortable with endless mortgage loans, a suddenly commonplace scenario for even the most financially conservative citizens. The subprime mortgage crisis began the financial meltdown, as potential investors could no longer afford houses despite the falling prices that discouraged sellers. Real estate agencies, crippled by unwise previous investments, lacked the funding to supply enough loans to meet investor demand. The United States real estate market lost six trillion dollars in value from September 2006 to September 2008 (Amerman).
In addition to punishing sellers and mortgage applicants, falling housing prices also forecast higher unemployment rates. A New York Times article revealed that America has lost nearly 3.6 million jobs since the recession began in December 2007 (Andrews). This recession has made it nearly impossible for me to find work since graduating high school. From applying for seasonal work at Costco last summer to sending my résumé to JPMorgan Chase for an internship, I have never received a return call, let alone an interview. My friends face the same difficulties, often failing to pay bills after employers lay them off to reduce expenses. While unemployment paychecks protect citizens, the compensation is insufficient for an escalating cost of living and the checks are usually limited to only six months. At the University of Michigan’s Ross School of Business, a Monroe Street Journal survey found that only 77 percent of graduating seniors have received job offers so far this school year. This compares to the 91 percent who had received offers at this time last year (Hurst). Whether someone is a cook at Taco Bell or an accountant at Ernst & Young, job security is a major concern. Struggling companies first cut employees to reduce expenses, explaining the high unemployment rate. A successful bailout package will give firms the funds necessary to expand and thus demand more labor, relieving us from these alarming conditions. If we want to put food on the table and pay the rent on time, then we have to accept the tax hike associated with the financial bailout.
The financial crisis harms the entire nation’s economy because consumers and investors hesitate to spend and invest. Enter the current economic recession, which pundits compare to the Great Depression. During the Depression, nearly one-half of American banks failed, the national unemployment rate skyrocketed to 25 percent, and the government classified over 60 percent of Americans as poor according to the Library of Economics and Liberty (Smiley). Today’s economy exhibits similar statistics. The national unemployment rate is again rising, and is currently at 8.5 percent, the highest in over 25 years (US Bureau of Labor Statistics). Three of the nation’s top five investment banks collapsed in 2008 – Lehman Brothers, Merrill Lynch, and Citi. The insurance provider American International Group, one of the most prominent corporations in the world, suffered a liquidity crisis and lost over 99 billion dollars in 2008 (US Securities and Exchange Commission). Unless Americans take action, these numbers will only worsen. To avert another Great Depression, we need to endorse the bailout packages, pending their stipulations.
Opponents equate bailouts to socialism, robbing innocent Americans to recompense the mortgage brokers and investment bankers whose own greed created their plight. These companies were careless but are still extremely influential in our financial markets and lending systems. If the government denies them assistance, the crisis will spiral into an uncontrollable fiasco. Without funding, our banks cannot support their operating activities and provide citizens with loans. Other companies will inevitably downsize, costing millions of citizens their jobs. Most Americans will support the industry if they consider the alternatives, including mortgage crises and record unemployment. Defending a new 787 billion dollar bailout plan entitled the Economic Stimulus Package, President Barack Obama assured citizens that this is not “your run of the mill recession…. My bottom line is to make sure that we are saving or creating four million jobs, we are making sure that the financial system is working again, that homeowners are getting some relief" (Henry and Paulson). Banks and other lending institutions administer our housing loans, retirement funds, stocks, bonds, and financial aid. Influential banking and mortgage corporations including Bear Stearns, Washington Mutual, and Fannie Mae have already declared bankruptcy or received government assistance, damaging the weakened market. These companies’ downfalls partially generated a 33 percent decline in the Dow Jones Stock Index, drawing increased comparisons to the Great Depression. Despite greater investing, the average 401(k) account lost 27 percent of its worth in 2008 due to the collapse of investment banks (MSN Money). If our banks fail, we will lose the retirement funds saved all the way through our careers, preventing us from retiring on time. Our homes, so heavily invested in, will continue to depreciate dramatically. Our money is already unsafe no matter where we deposit it, with the chance of losing major investments rising. If the government had not immediately reacted to the September Lehman Brothers and Merrill Lynch collapses with the Emergency Economic Stabilization Act, one can only imagine the resulting situation’s severity. We must prevent the bankruptcy of entities responsible for our money, especially since most of these companies are globally active with foreign subsidiaries and foreign investors. Clearly, we have too much at stake to allow our largest companies to fail.
To support bailouts totaling over one trillion dollars, the federal government will need to raise taxes in future years, especially because of the debt incurred from the Iraq and Afghanistan wars. If we want jobs and stable economic conditions in future years, we have no choice but to pay these taxes. Most fund-seeking companies cannot accept government loans because of their hefty liabilities. The government has no option besides taxpayers to support bailout funds. While many of us denounce this new practice, we overlook that rescued companies will help us escape the current economic predicament through lending and hiring. Banks will have the funds to lend to one another, a core activity of our financial system. The banking industry is essential to not only our nation, but also the international economy. Without this industry, governments and investors cannot issue and trade the securities that drive our economy. Circumstances will worsen until companies recapture consumer confidence, an impossible feat under today’s doubtful, fluctuating conditions.
Forcing taxpayers to cover the hefty liabilities of companies is never fair, but desperate times require desperate measures. Citing higher taxes in the future as their primary concern, bailout cynics complain of citizens bearing the responsibility, forgetting that there is no alternative. Higher taxes are a better long-term solution than increased bankruptcy and unemployment rates. In a no-win situation, we should minimize our suffering. Our jobs and the national economy are at stake; a financial meltdown would punish every American far worse than a few extra tax dollars invested toward preventing such a meltdown. However, bailout opponents dispute that they can spend the money more effectively than corporate officials can, and that funding will defer responsibility from the recipients. Consequently, the bankers, mortgage brokers, and refinancers will see no harm in their reprehensible actions. They will continue purchasing multimillion-dollar houses and driving Ferraris to work, eventually creating another financial crisis. After all, John Thain is not the only ravenous executive; the New York Times noted that financial institutions awarded 18 billion dollars in 2008 administrative bonuses while begging for government assistance (White). Bailout funds could be useful if they did not go straight into executives’ wallets, but these executives are too greedy to consider the long-term consequences of their actions. Many banks refuse to discuss their use of the bailout money, clearly attempting to conceal excessive compensation. As long as the companies’ decision-makers have no one to answer to, they have no incentive to renounce their ways.
When Congress approved a 17.4 billion dollar loan to GM and Chrysler, they imposed extremely stringent guidelines on properly allocating the money. To continue receiving funds, both corporations must prove that they can regain a competitive edge, become profitable, and sell unnecessary possessions. They also have to adhere to the remaining guidelines that focus on preserving as many jobs as possible and producing fuel-efficient vehicles to attract a conservative customer base. The loan’s steadfast conditions have forced the automakers to invest in technology that will increase the efficiency of production and gas mileage, displayed by the newest models the 2009 Detroit Auto Show.
The relative success of the automotive bailout suggests that financial bailouts also have potential for success. Taxpayer dollars will not enrich shareholders and executives in a proper bailout. This implies that the government cannot merely send Bank of America or American International Group massive checks and anticipate immediate results. All bailout recipients must appropriately allot the money, proving that they are not as negligent as their past decisions convey. Unfortunately, the Bush administration and former Congress hardly attempted to control recipients’ use of funds. The Obama administration cannot allow the same abuse of taxpayer dollars. To improve the economy and encourage lending amongst banks, the new Economic Stimulus Package must curb recipients’ spending, especially superfluous executive compensation. By provisioning the funds and opting for loans instead of donations whenever possible, we can achieve a reliable bailout system. President Obama understands that the government must use taxpayers’ dollars as effectively as possible. According to the New York Times, the final Economic Stimulus Package actually reduces the burden on citizens with a 70 billion dollar tax cut (Herszehorn and Hulse). If we are resorting to this desperate measure, we cannot allow the misplacement of even a dollar. We need to provision the bailout and Obama will work with Congress to prevent executives from stealing our money. Upon learning that financial executives earned 18 billion dollars in bonuses during 2008 – while begging for bailout funds – Obama labeled their excessive actions “shameful.” He elaborated with Channel News Asia, adding, “What gets people upset, and rightfully so, are executives being rewarded for failure, especially when those rewards are subsidized by US taxpayers” (CNA). To provision the bailout, Obama mandated that companies seeking bailout funds limit administrative compensation to 500,000 dollars and decrease stock options, according to the San Francisco Chronicle. Obama highlighted the executive bonuses in 2008 to notify bailout recipients that he will not tolerate their egocentric actions.
The government needs to mandate strict terms as it did for the automakers to ensure that no infringement occurs, serving as the party that holds corporate decision makers accountable. It should prevent a double standard between automakers and financial institutions. A stricter bailout will stabilize our economy and begin the slow, arduous process of recovery because the companies will use the money to expand and promote lending activities. Major companies will grow independent of government assistance, and consumer confidence will return due to the increase in lending coupled with restrictions on wasteful spending. Finally, firms will increase their business as money flows back and forth between banks and begin hiring workers, reducing unemployment.
As Americans, we cannot sit idly and watch our financial system fail. When Fortune 500 companies file for bankruptcy, the entire nation feels the hardship, from ill-timed investors to laid-off employees. Unlike other economic recessions, the current one has affected jobs in nearly every industry. Especially troubling are the job loss figures in the automotive and financial sectors. Our government appropriately provisioned bailout funds for GM and Chrysler, but not for financial institutions that remain in peril. Millions of Americans realize the importance of our financial system and are willing to help the major companies in distress. While unfair, we must protect our economy or subject ourselves to another Great Depression. However, we must do it the right way, with stringent regulations. Better days lie ahead, but only if we are willing to act.
Posted by iaijazud at July 26, 2009 07:22 PM