Does CitiGroup deserve a government umbrella?
I guess the broader question, does any large commercial business deserve to be bailed out? Well, clearly Mom and Pop businesses fail every day. Yet, the government does nothing. Why do large conglomerates deserve special treatment?
The short answer is that there is some magical threshold where there are too many people who would lose their jobs as a result of the failure combined with possible economic ramifications. But, still, does that warrant a bailout? No.
If a business cannot run itself in a fiscally appropriate manner (large or small) it deserves to fail and go away. If any of your family is employed by CitiGroup or any financial company caught up in the turmoil of the financial sector crisis, I feel for you. But, that doesn’t mean that the company deserves to continue to exist if they cannot maintain profitability even in the toughest of times. Fiscal responsibility starts at the top of the company and trickles down to even the most bottom level employee.
What does this mean? It means, don’t request a new computer every year. Don’t ask for Herman Miller chairs and the most expensive ergonomic keyboard simply because you can. If the item is considered ergonomic, the company is almost obligated to make sure you get it. Buying all of these expensive amenities for your desk makes you fiscally irresponsible to the company if you don’t really need it (and, in most cases, you don’t). But, that’s not to say that this is responsible for CitiGroup’s problems.
Who knows where the money hemmorage is going inside these companies. But, clearly, it’s not going back into the business. Again, I ask, why do these companies deserved to be bailed out? What makes them special? I have no sympathy for large companies that can’t properly manage themselves. Neither should the government. Spending all of this money to prop up these badly run organizations is clearly counter to free enterprise.
In Free Enterprise you have to take the good with the bad. That means, when business is good, you profit. When it’s bad, you bankrupt and close. There needs to be no governmental cushion here to soften the fall.
Does CitiGroup or any other badly run business deserve an umbrella? What do you think?
State of the economy
Unless you’ve been hiding in a cave, you’re probably well aware of the issues facing the banking and finance sectors of the economy. Here are my thoughts on this.
What started it all?
Clearly, this whole debacle started when the feds lowered the interest rate to 1% and the mortgage firms saw a field day. One only had to listen to the radio for about 5 minutes to hear a commercial for some bank advertising stupendous mortgage rates. During this period, this became known as the housing bubble. This sector was primarily propping up the economy even when consumer spending in other areas was lackluster.
Government regulation (or lack thereof)
First, this whole debacle would not have become an issue if the government had been properly regulating the banking industry. Unfortunately, this presidential administration has been so pro-business that they would let anything and everything slide to let businesses do whatever they want. Is government to blame? Yes, but only partly. The rest of the blame falls squarely on the businesses.
Does AIG and Lehman Brother’s deserve to fail? Most certainly they do. Badly run companies need to go away. If a company can’t do the proper things to ensure continued success, then they deserve to fail. Unfortunately, the government and the stock market don’t see it that way. Because AIG and Lehman propped up much of the banking industry with their services, letting these businesses fail is tantamount to pulling the rug out from under you while you’re walking. The issue here is… putting all your eggs in one basket. Drop the basket and.. you get the idea. Government LET banks basically put their eggs into one basket by allowing bank sector consolidations (this goes back to letting businesses do whatever they want to do). Instead of raising an issue when it should have been raised, the government just sat there and said nothing. So, instead of saying.. no, there must be several insurers to prevent ‘eggs in one basket’, the banks’ insurance policies were not policed and were primarily underwritten by AIG.
Lending Practices
The banks, brokers and mortgage firms are clearly to blame for beginning this debacle. If they had been practicing proper loan practices, this issue would not have occurred. Instead, they were not only handing out loans to anyone and everyone, they were handing out risky loans. Loans such as interest-only loans for the first two years or adjustable rate mortgages (ARMs) that would also reset in 2 years.
Then, we had the speculators buying two, three, four or more homes all with multiple loans given by these ever-so-gracious banks. It’s not as if the handwriting wasn’t on the wall. But, again, no one stepped in to put on the brakes.
So, the foreclosures started, homes got devalued, more foreclosures ensued, banks began losing their interest payments and gaining properties they couldn’t sell… Banks tried to collect on their insurance policies for a bad loan from AIG. The payouts forced it to bubbled up to the top feeders who’s bottom lines got severely hit (like AIG and Lehman). Then, bankruptcy…
Bailout
So, that’s all hindsight.. what do we do now? The primary issue at this point is the bailout. Should it be allowed? Clearly, congress didn’t think so in the form that it was submitted. Personally, I’m torn. As a taxpayer, I don’t want to be forced to help bail out a company that isn’t run properly. If a company chooses to use policy holder premiums to buy executives parties, cars, yachts, summer and winter homes, vacations and everything else that can be thought of instead of banking that money in the case of insurance payout or to help fund rough times. then they need to go away.
On the other hand, I don’t really want the economy to go into the toilet. However, I think this issue is inevitable. The bailout is simply a bandaid. If the bailout does anything, it will just delay the economic issues until a few years out. Perhaps the bailout will smooth it out a little more than without it, but I don’t see the economy getting tremendously better with a bailout than without.
Tip of the iceberg
Worse, we are only seeing the tippy top of the iceberg. There’s way much more under water than we can’t see. How many other banks or financial institutions will fail before it’s all said and done? This is still unclear. There is also a trickledown here that just hasn’t completely trickled down yet. For example, local cities and municipalities will feel the crunch come property tax time. Now that so many homes are in foreclosure, the tax base is probably 75% of what it was… perhaps even less. Banks won’t pay the taxes on properties and the former owners won’t either. So, come 2009, and these municipalities will be struggling for budgets. This leaves police, fire and even education in the lurch again… and we haven’t even gotten there yet.
Stimulus Package given back
Since Bush has taken office, he’s given out two stimulus packages of around $500 each. That’s a total of $1000 to each person. However, if we are forced to bail out AIG, all of that stimulus will be wiped out and we, the taxpayer, will be forced to double that again (around $2-4k per person) to cover the bailout. We’re just going to give our stimulus package right back to the government and then also hand over additional cash.
So, where from here? The path is definitely not clear. But, the US certainly needs dramatic help both in government and in corporate businesses. How that’s supposed to happen, again, is not clear. But, we are certainly not on the path to success with skyrocketing deficit combined with financial debacles such as this. One thing is crystal clear, government needs to regulate corporations that cannot regulate themselves… and they need to regulate them BEFORE the issues become debacles.
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