Bailout vs. Bankruptcy

450 words | 2 page(s)

Over the last several years, the issue of government bailouts has been increasingly brought to the forefront. This is because of controversies surrounding, if these programs are effective and their capacity to help firms become more competitive. However, in spite of these differences, the reality is they are successful over the long term. To fully understand what is happening requires looking at both sides of the issue. Together, these elements will illustrate how bailouts are providing added amounts of stimulus to the most vulnerable organizations at critical times.

From a historical perspectives, bailouts have been shown to be effective in the long term. This is because the free markets will go through continuous boom and bust cycles. During periods when the economy is facing severe economic challenges, they help to provide added amounts of support. This enables lenders to have the liquidity to continue making loans and it improves consumer spending. These factors mean that businesses will continue to hire new employees and purchase / replace equipment. During the last recession, these programs were instrumental in preventing entire industries from collapsing. A good example of this can be seen with the financial system. If the government had not provided bailouts to: Citigroup, AIG, Goldman Sachs and Bank America. There is a realistic possibility, the entire financial sector would have collapsed. This is because lending activities were curtailed and businesses / consumers did not have access to loans. Once this occurred, is the point the economy continued to become worse until these actions were taken. (Wright, 2013)

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However, there are others who believe that these programs are ineffective. This is because the free markets are based on firms remaining profitable. Those who are the weakest, will go bankrupt, from failing to engage in more responsible business practices. This is the point they can reorganize and emerge stronger. (Sanchez, 2010)

The problem with this kind of thinking, is that it is failing to understand the long term effects of these policies on numerous sectors. For example, during the Great Depression, the government took a laissez fair attitude towards economic policies. The result is that entire industries were collapsing and the standard of living was severely eroded. Those firms that were too big to fail, entered bankruptcy and never emerged. These actions created a downward spiral which lasted from 1929 to 1933. It was not until the government implemented the New Deal, when the economy stabilized and experienced steady amounts of growth. (Crafts, 2013) As a result, one could argue that bailouts are vital in preventing large firms from disappearing. They provide these organizations, with the working capital they need to make adjustments over the short term. This is when they can adapt to these conditions and become more flexible.

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