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What is a Bailout?

2017-06-27T15:37:59+00:00

The term 'Bailout' is included in the Banking edition of the Financial Dictionary. Get yours now on amazon in ebook or paperback format. Read more here...

Bailouts prove to be the action of handing money or other capital to a company, individual, or nation that will likely go down without help. This is done in an effort to keep the entity from financial insolvency, bankruptcy, or total failure. Sometimes bankruptcies are pursued to permit an organization to fail without panic, so that fear and systemic failure does not become endemic, taking down other similar entities along the way.

Various different groups might qualify for urgent bailouts. Countries like Greece have been prime examples in the year 2010. Companies such as major banks and insurance outfits have been deemed too big to fail in the several years preceding 2010, during the height of the financial crisis and resulting Great Recession. Other industries have qualified as well, including car manufacturers, airlines, and vital transportation industries.

A good example of companies that receive preferential bailout treatment lies in the transportation industry. The Untied States government believes that transportation proves to be the underlying core of the nation’s economic versatility, necessary to support the country’s geopolitical power.

Because of this, the Federal Government works to safeguard the largest companies involved in transportation from failing with low interest rate loans and subsidies, which are a form of bailout. Oil companies, airlines, railroads, and trucking companies could all be considered to be a critical part of this industry. Such firms are considered to be too big and important to fail because their services prove to be nationally and constantly necessary to support the country’s economy and thereby its eventual security.

Bailouts that are done in an emergency fashion typically prove to be full of controversy. In 2008 in the United States, intense and angry debates erupted regarding the failing banking and car manufacturing businesses. The camp standing against such bailouts looked at them as a means of passing the expensive bill for the failures over to the taxpayers.

Leaders of this group savagely denounced any monetary bailouts of the big three car makers and large banks, which they said all needed to be broken up as punishment for mismanagement. They criticized a new moral hazard that was being created by guaranteeing safety nets to other businesses. They similarly did not like the big central bureaucracy that arises from government agencies selecting the size and disposition of the bailouts. Finally, government bailouts of these groups were attacked as a form of corporate welfare that continues the cycle of more corporate irresponsibility.

The other camp argued that these bailouts were necessary evils, since the state of the American economy did not prove to be solid enough to suffer the failure of either the major banks or the car makers. With the car makers, fully three million jobs stood on the line. The banking industry had the argument of systemic failure of the financial system backing it up. No one on the side of the bailouts pretended to like having to engage in them, but they were said to be necessary nonetheless. In the end, such bailouts were issued to both major industries totaling in the trillions of dollars.

The term 'Bailout' is included in the Banking edition of the Financial Dictionary. You can get your copy on amazon in Kindle or Paperback version. See more details here.