Many financial institutions that are saddled with risky mortgage backed securities can no longer afford to extend new credit. Unfortunately, making loans is how banks stay in business. If their current loans are not bringing in a positive cash flow and they cannot loan new money to individuals and businesses, that financial institution is not long for this world.
The idea behind the economic bailout is to buy these risky mortgage backed securities from financial institutions, giving these banks the opportunity to lend more money to individuals and businesses, hopefully spurring on the economy. General Motors GM is the second largest automobile manufacturer in the world. However, the last years GM had several problems. To be more accurate, Wagoner blames the following aspects as reasons of the misfortune of GM.
First of all, the Great Recession in is a big reason for the failure. Due to this recession the whole sales, especially the ones of the automobile industry, decreased.
Secondly, the labour costs, are blamed for the misfortune of GM. Compared to other automobile manufacturers, the number of retirees and the labour costs for these are too large. Last but not least, GM underestimated hybrid and electric technology in the last years. Even though they had first mass-produced electric car, GM cancelled the production in due to a lack of demand. Without external money, GM would become bankrupt. Markets should be free of governmental interventions and be based on mutual self interest.
The invisible hand is a metaphor that suggests, that if there is a market error, the market will heal itself and find the way back to equilibrium itself.
In a free market demand and supply are always ideal; there are no monopolies or oligopolies. The state only creates a regulatory frame for the market, it does not intervene or control.
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Governments should play only a limited role in markets. Capitalism promotes unjust inequality; workers are not paid the full value of their labor, only what they need to subsist. Productive property should serve the needs of all and should not be privately owned. The state of the Proletariat will gradually worsen as the Bourgeois will exploit them. This will lead to a clash, the Proletarians of the world will unite overcome capitalism through socialism and finally reach communism, which is the final state of the world.
Smith believes in the idea of a free-market with no governmental interference.
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Government citizens. The fact that the investors already spend the money on shares, lost the money and now asks for new money to cover up their losses is totally against the idea of a fair distribution of wealth. In this case the bourgeoisie suppresses the proletarians and Marx wants to free the proletarians. He was against the idea of social hierarchy. Event 2: The U. S government approves the loan money out of the TARP funds.
Government Bailouts of Private Industry - Research Paper Example
This is because of the reason given above and besides that, it is conflicting with the whole idea of the American economic system which he supports. Smith believes in the invisible hand theory which states that markets will heal itself. Companies fall while others are rising and this is part of a well functioning economy. Government uses tax money to save the bourgeois company.
On the other hand proletarian workers are saved from unemployment.
In socialism government is obliged to provide a job for each citizen. There is no unemployment. Locke would state that the right of property is violated because the government took it away from the investors. The right of property is important in his theory.
Governments should not interfere in economic systems and should not own any part of a company. Marx believes that property should be owned by the people and not by the private few. Even though government bailouts were not popular, especially in the automobile industry, hundred leading economics wrote a letter to the U. Due to no particular plans concerning neither the use of these funds nor the strategic improvements, the U. GM had to improve their plans before receiving funds. In December the Bush administration decided that the U.
GM received consequently funds of about Before receiving the money, the U. Barack Obama cancelled the bailout and wanted GM to reduce its labour costs, the models and numbers of cars to be competitive worldwide. However, GM still needed That is why drastic measures were needed and the U. In mid-November, the spread seems to have stabilized, but this happened at a frighteningly high.
How much additional capital, private and sovereign, must be from banks and other financial intermediaries to investors found that their risk associated with deposits in these institutions and the acquisition of their debt is not excessively high — that, in fact, is a mandatory precondition for the crisis? Of course, a linear extrapolation gives only a very rough approximation. Bank and Greek Bailouts. In turn, state loan eventually acted as a counterparty of a large segment of the financial intermediation. However, for reasons that go far beyond the scope of this essay, I am absolutely convinced that the provision of state credits should be a temporary measure.
And if so, where is the source of new private capital, which will bring the state loans from the financial system? Now the markets are overwhelmed by this fear, which they have not experienced since the beginning of XX century. Because of the fact that the human nature is still the same, we can count on changing trends in the markets in a year. Although the capital gain is not a source of financing the real economy, it could improve the financial statements.
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This is best seen in the context of the consolidated balance sheet of the global economy. Obviously, the higher the capitalization of global stock market is, the greater is the amount of capital that can go on the recapitalization of financial institutions. Lower stock prices may hinder this process. However, there was a clear understanding of the fact that the bank system should survive under any circumstances. To sum it up I would like to say that despite the hard criticism in society, the U. Everybody had seen the consequences of Lehman Brother bankruptcy to the economy and the Government was forced prevent further collapse of our economic system and allow the biggest bailout in the U.
It is essential to note that there was a clear understanding of the fact that the bank system should stand in any case. Of course our financial system in general and bank system in particular is far away from ideal and has a lot of negative sides. However, I believe that our financial system should be changed by evolutionary rather than revolutionary means — that is why personally I believe that U.
Automotive Industry Bailout Essay
Thereby, we were able to save our present posture of affairs and win some time to change the rules of financial sector interaction for everybody and become more responsible for our deeds. Disclaimer Custom papers you get from our writing experts should be used for research purposes only. Firstly, interest rates have been cut by 0. Secondly, the government has offered help for the beleagured banking system. The UK bailout Plan involves 1.
Banks Selling Shares to Government. As these banks and one building society need to raise their cash ratios. Government Guarantee for Debt. This makes it easier for banks to sell short and medium term debts to raise finance and improve their liquidity.