Move Aside Government Bailouts; Time to Let Capitalism Reign

When the financial crisis hit, U.S. government bailouts became available to many big corporations. Back then, president Obama claimed that the 500 million shares that taxpayers were investing in General Motors Company (NYSE/GM) at $33.00 a share were an investment in the future of the U.S. economy.

That is the problem with governments. They should focus on policy tools to make it easier for businesses to invest and create jobs. Picking winners and losers in a capitalist system is best left to the system itself and not government bailouts. Government bailouts protect the losers, which capitalism weeds out; these are the companies that counterproductive to the long-term health of the U.S. economy.

The government bailout of GM allowed the company to come out of bankruptcy and forget the financial crisis ever happened. Since taxpayers paid $33.00 a share for GM, the stock is now down to roughly $19.50!

The loss to taxpayers—if the shares were sold—is roughly $16.6 billion!

While taxpayers are sitting on losses, there are further benefits that GM was privy to that would never be available to anyone else if capitalism ruled the day and government bailouts weren’t allowed to interfere.

When a company declares bankruptcy, its debts are removed from its balance sheet, but so are the previous years’ losses, which can be used against future gains in order for the corporation not to pay taxes.

However, President Obama allowed GM to keep its past losses to the tune of $45.0 billion, which is a form of another government bailout. (Source: Investor’s Business Daily, July 3, 2012.) This government bailout tax advantage is worth another $18.0 billion to GM. When GM recently declared a profit, it paid no taxes, as it was able to use previous years’ losses to offset the gain. The financial crisis worked out fine for GM.

If we look at the various ratings of cars made by the big manufacturers, GM cars still tend to be rated poorly compared to most other manufacturers, financial crisis notwithstanding.

This is why policy should be left to policymakers and capitalism should be left to its own devices. This government bailout is going to require quite a comeback from GM to make it profitable for taxpayers to come out on top.

Certainly the slowdown in China and the recession in Europe are hurting GM sales, which is no fault of the company. However, GM’s inability to gain market share and produce cars that garner high ratings is its own fault.

If the U.S. government honored the pensions of the workers and allowed GM to go bankrupt instead of providing it with a government bailout, would it have been the end of the world?

No. If the market needed another automaker, another would have eventually popped up, thanks to a free market system.

Government bailouts simply allowed failed institutions to somehow live. Is this good for the long-term viability of the U.S. economy? No. Does the financial crisis excuse the fact that taxpayers have very little hope of recovering this investment?

I’ve been saying for months now the financial crisis is not over. Because of government intervention in the market, the “washout” that usually follows an economic downturn never fully occurred.

Personally, I’m very interested to see how the government responds to the next leg of the original downturn (see: “The 2013 U.S. Recession”). It’s been years now of government bailouts, rising government debt, artificially low interest rates, and money printing with no real structural improvement to the economy (as witnessed by today’s U.S. job numbers).

Here’s a novel idea: let capitalism reign.

Where the Market Stands; Where it’s Headed:

Month after month, U.S. job numbers disappoint. It is becoming increasingly apparent the U.S. economy is not improving; it is deteriorating. We have a stock market propped up by rising government debt and money printing.

The second half of 2012 will be extremely difficult for the U.S. economy (see: “How the Balance of 2012 Will Go”). The bear market rally in stocks that started in the spring of 2009 is getting closer and closer to its end.

What He Said:

“A Stock Market’s Obituary: It is with great sadness that we announce the passing of the Dow Jones Industrial Average. After a strong and courageous battle, the Dow Jones fell victim to a credit crisis and finally succumbed on Friday, October 3, 2008, when it fell decisively below the mid-point between its 2002 low and its 2007 high.” Michael Lombardi in Profit Confidential, October 6, 2008. From October 6, 2008 to November 27, 2008, the Dow Jones Industrial Average experienced one of its biggest two-month losses in history.