What is a Bailout?
The word ‘bailout’ is when a bankrupt, or nearly bankrupt, business, such as a bank or corporation, is given more liquidity so it can meet its financial obligations. Usually this kind of company has a short-term cash flow problem but has sufficient assets, so its given funds to tide it over.
The government normally only steps in if the troubled company is a very large company whose failure would cause negative repercussions for the economy.
Some Americans think the government should not step in to bailout a company since there is a reason the company has failed in the public arena. When the government bails a company out, it can be seen like the government is overruling the will of the consumer.
Why Did We Need the Government Bailout?
President Bush and his advisers typically have opposed bailouts but our country is in the midst of a mortgage crisis. Healthy credit markets are needed for a smooth-running economy. Banks use the credit markets to fund their every day activities so when the credit market tightens, less money is available for banks to loan to individuals and businesses. This brings every day economic activities, like home buyers getting a mortgage, to a screeching halt.
Many of our nation’s top financial institutions, like Bear Stearns, Fannie Mae and Freddie Mac, insurance conglomerate American International Group, Citigroup, JPMorgan Chase, Bank of America, Goldman Sachs, Merrill Lynch and Lehman Brothers have already been recently bailed out or soon need to be.
The bailout plan, called the Emergency Economic Stabilization Act of 2008, is also going to beef up the pool of money at the Federal Deposit Insurance Corporation, the institution responsible for insuring citizens’ bank deposits.
President Bush signed the historic $700 billion government bailout into law recently, in order to give liquidity to the financial markets and help improve the economy. The government will buy distressed mortgages and assets, not entire institutions. The money will ultimately come from taxpayers, although most likely not immediately. Many economic advisers worried if the plan was not signed, Americans would face a recession as bad as the Great Depression.
Other Articles you May Enjoy
Use BailoutSleuth.com to Track the Government Bailout
{ 1 trackback }
{ 0 comments… add one now }