What is a Bail out? Does the term ‘bail out’ only apply everyone’s taxes being used to help a firm survive tough times?
Let me give an example. Suppose the Federal Government charged the four largest US owned financial institutions a fee to cover the costs of any bankruptcy and liquidation proceedings? Is that a bail out? Or is that simply a wise decision? The Democrats do not think that it is a bail out because the taxpayers who have not invested in those four financial institutions will not pay for the foreclosure and liquidation. The Republicans think it is a bail out and hence use the term ‘bail out’ to describe it when speaking in public. Considering that the banks will pass on the fee to their customers, I could understand that the Republicans would define it as a bail out.
Ask yourself this: If the combined income of the four largest banking institutions was given as a percent of the GDP (Gross Domestic Product,) what would that percentage be? According to one Republican Senator, who objects to the phrase ‘Too Big To Fail,’ that income is 50% of the total GDP. Now, for those four banks, is that too big to fail? The phrase ‘too big to fail’ simply means that the failure would probably cause the economy to dive into a recession. Would anyone deny that?
Lets put it in more understandable terms that don’ require a knowledge of the financial world. Let’s assume that one supermarket chain provides 50% of the groceries the US consumers buy. Does the failure of that supermarket chain constitute a threat to the supply of food? And if it does, would the failure of that supermarket chain have a devastating effect on the price of food and therefore on every consumer? If you live in a small town far from any large city and you had to buy your food from convenience stores when that supermarket chain failed, would you feel that supermarket chain was too big to fail? Could that supermarket chain even be considered too big to fail? Remember I am not simply speaking of one supermarket in one city. I am speaking of a supermarket chain.
This same Republican advocates breaking up large banks. That is an idea worth considering. If it isn’t too big to fail, why break it up? He wants the shareholder and executives and (I assume) bondholders to pay for the demise of the bank. Furthermore, he wants those people to pay at the time of the demise of the bank. My question is; What does he want to do if those people lost so much that they cannot pay?
My conclusion is that the Republicans know that there is such a thing as too big to fail. But they don’t want the phrase used as an excuse for a bail out.