February 25, 2008
Profitable Government Buyout/Bailouts
Whenever a market is in severe distress, we can be sure that several commentators, many of whom are economists, will argue for a structured government buyout, bailout. "The government should buy.... and then resell the assets slowly over time. The government will stop the bleeding and may even make a small profit." The government showed a profit when it bought failed Savings & Loan assets and when, in the thirties, it bought mortgages in default (the HOLC, Home Owner's Loan Corporation). Remember also that government support of Chrysler by buying bonds also showed a profit (Chrysler paid off all the bonds). The blank is filled in today by 1) failing CDOs, 2) defaulting sub-prime mortgages, and 3) struggling insurance companies that provide credit default guarantees. All three industries have advocates for government buyout, bailouts. Can government develop a clear ear for deciding when to do buyout, bailouts and when to pass? Political pressures should not determine the choice; can government resist choices based on raw political pressures? I am skeptical (but believe that a buyout, bailout of credit default companies may make some sense).
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