Government Bailouts

Goals:

  • Describe the major government interventions during the 2008 financial crisis
  • Explore the role of government intervention in enterprise
  • Make lecture memorable to increase retention

Relevant Clips:

Overview:

One of the major controversies of the 2008 financial crisis was the US government’s bailout of the financial sector with the passage of the Emergency Economic Stabilization Act of 2008. This Act authorized the US Treasury to buy risky assets from troubled banks to the tune of $700 billion. The government would go on to bailout General Motors and Chrysler as well as offer a line of credit to Ford in case they needed it down the line. Chrysler and General Motors would eventually file for bankruptcy. At the time, the American public supported bailing out the financial sector (57%), but a few years later only 39% of Americas felt it was the right course of action. The opposite was true in the case of the auto bailout where 37% of Americans believe the loans were mostly good for the economy at the time of their issuance compared to 56% of Americans a few years later. Politico’s Ben White had an interesting take on the public sentiment surrounding the public’s perception:

Discussion:

After showing Ron’s Pyramid of Greatness, it’s important to discuss the role and function of government in a market-based economy. Ron argues that capitalism is God’s way of determining who is rich and who is poor, but people generally believe society should be more equal than it currently is. If capitalism and the free market are responsible for making some people poor, should the government play a role in rebalancing that inequality?

The second and third clip are from the 16th episode of the 5th season where a local video rental store is going out of business and Leslie tries to step in to save the store for cultural reasons. Ron is unhappy since it represents a government bailout of a small business (this episode aired in 2013) and believes the government should not intervene. One of the arguments in favor of supporting the financial and automotive industry was based on the size of the industry. Both were deemed “too big to fail” and advisors felt that a bailout was warranted to protect the US economy. A small video rental store, however, is unlikely to have the same ripple effect as the automotive industry. It’s worth trying to find a consensus on what size business is appropriate for government support and which ones are not.

The final segment begs the question of what role the government should play when it comes to enterprise. While there are legitimate necessities for government intervention surrounding market failures or public goods, there’s less economic support for government intervention in competitive markets. Governments can intervene in natural monopolies to ensure an increase in social welfare, but it isn’t clear what benefits government provides in more competitive markets.