Sep.24, 2012 | 7:46 AM–When should the government, on behalf of the public, rescue a business on the brink of collapse? This question has made its way back into the public discourse in, of all places, the United States, the bastion of capitalism, as part of the ideological and economic debate between Republicans and Democrats.
It was President Barack Obama who raised the issue, and the reason is clear: One of his first decisions after being sworn in was to rescue General Motors and Chrysler. Their debts were frozen, ownership was transferred to the government, the companies recovered, and the government sold its shares in a public offering. GM was saved.
Former President Bill Clinton, speaking at the Democratic National Convention in what is considered his best speech ever, also focused on GM. “Now there are 250,000 more people working in the auto industry than the day the companies were restructured. Governor Romney opposed the plan to save GM and Chrysler,” said Clinton, concluding with a charismatic flourish: “So here’s another jobs score: Obama, 250,000 – Romney, zero.”
Are these figures accurate? That’s far from certain. This was an election speech and each candidate cooks the statistics according to his objectives, but the effect was convincing. Nobody has any doubt anymore that in every economy there are companies and organizations that are too big to fail. These can be divided into several types:
1. Organizations that are part of a complex and extensive network of business relationships, and by failing could take an entire industry or even the entire economy down with them. Banks are the best example. Four years ago Lehman Brothers collapsed, nearly dragging down the global financial system.
Today nobody would let such a bank fail except via a structured, orderly and slow process. In a bailout of this type, price has almost no significance because it’s clearly much less costly than the alternative: doing nothing and letting the whole economic system collapse…Read More>>