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Thursday, March 12, 2009

Excuse Me, Can I Return This Bailout?

With government funds come government controls and meddling … and of course, costs.

This political/economic reality apparently was forgotten by various businesses that recently sought and received bailouts courtesy of U.S. taxpayers.

Everyone should read a front-page story in the March 11 New York Times. It serves as another reminder of the many costs that come with government sticking its nose deep into the private marketplace.

The article is titled “Some Banks, Feeling Chained, Want to Return Bailout Money,” and a few points are worth citing here:

• “Financial institutions that are getting government bailout funds have been told to put off evictions and modify mortgages for distressed homeowners. They must let shareholders vote on executive pay packages. They must slash dividends, cancel employee training and morale-building exercises, and withdraw job offers to foreign citizens.”

• “Some bankers say the conditions have become so onerous that they want to return the bailout money. The list includes small banks like the TCF Financial Corporation of Wayzata, Minn., and Iberia Bank of Lafayette, La., as well as giants like Goldman Sachs and Wells Fargo. They say they plan to return the money as quickly as possible or as soon as regulators set up a process to accept the refunds.”

• “[A] growing chorus of industry experts are warning that asking weak banks to carry out the government’s economic and social policies could increase the drain on the public purse. These experts say that the financial assistance, while helpful in the short run, could force weak banks to engage in lending practices that will lose even more money, and that the government inevitably will become more heavily involved in dictating how banks do business.”

• “Take Fannie Mae and Freddie Mac, the housing-finance companies that the government now controls. In recent months, they have been told to spend billions of dollars buying bundles of mortgages for which there are no other buyers, and to let homeowners refinance their loans — even if they have no equity. Such commands are echoes of the 1990s, when Fannie and Freddie tried to balance dueling mandates that required them to make a profit for their shareholders and to serve a public mission of increasing homeownership.”

The industry and businesses, their employees, investors and owners, and the taxpayers – it does not end well for any of them. Understand economics, politics and history, and none of this should surprise you.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

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