Corporate-bailouts-fueled-by-injections-and-printed-money

Corporate bailouts: fueled by injections and printed money

The game: 

From smartphones to the great depression: capitalism has blessed us with everything.

With great trial and error, we have adopted a system that springs prosperity and showers opportunity in society. The idea of having a free market, which isn’t bound by any government intervention is like a dream come true. However, nothing is perfect, and the world is no fairy tale. Riots and storms on wall street by socialists and the widening wealth gap have forced us to rethink capitalism. This game filled with winners and losers is flawed without a doubt, and it’s time to question where our hard-earned money is going. And surprisingly, the winners are not the only ones to blame! 

While the free market is worshipped, oftentimes, the government has to step in to solve a few problems that private individuals are too small to give a hand at. But when does the situation get so out of hand, that the government needs to step in?

Stimulus cheques: 

The largest government intervention is happening right now, in this pandemic-struck period when Covid-19 has given a devastating blow to the economy.

Despite this, the free market is still trying its best to fix itself. However, considering the unemployment rate and the record crashing of small businesses, the government decided to inject $4.1 trillion dollars into the economy under the ARPA and the CARES act.

The question is, where does the government get all of this money from? If you think this is all taxpayers’ money, you’re dead wrong! These two acts were nothing but stimulus cheques. Stimulus cheque money can be funded by government securities and the profits made by infrastructure projects like railways, buses, and even airports. 

Leaving infrastructure projects aside, the securities that governments profit from are either bonds, treasury holdings, or a large number of public shares and commodities. However, the practice of quantitative easing isn’t always the solution. The 2008 crisis is a great example of this, and while our previous blog clearly explains the situation, another problem was left ignored; the government held the asset that led to the economy’s demise; the mortgage-backed security. 

Understanding bonds: 

Bonds are nothing but company or government debt. Buying a government bond is lending the government some money. The gover5nment uses this money and typically pays interest twice a year. Suppose a bond is bought for $100, and the government eventually pays back the same amount of money in small amounts. This is exactly what bond maturity is; getting back the same amount of money that was invested in the bond plus interest. Bonds, as in, government bonds are issued by a national government. Moreover, bonds are one of the safest investments out there, so there are millions of middle-class folks actively buying bonds each year. 

Printing away to save the economy: 

Yet another way (the most popular one) governments can fund stimulus cheques, is by printing money. If you’ve read ‘All you need to know about inflation, you’re aware that printing money doesn’t always lead to inflation, although there are many factors to contribute. For the current situation, the U.S. treasury is known for printing money, which contributed to most of the cheques. And its impacts are yet to be seen if at all there will be because there is only so much the government can print before inflation hits. Some experts say that signs of inflation are already tearing their ugly heads. Warren Buffet, in the annual Berkshire Hathaway meeting, points out that steel and housing costs are already rising in some places. 

So at the end of the day, where is capitalism going? Can’t the free market we worship solve our problems? Well, this doesn’t seem to be the case; at least after looking back in time. 

The most vulnerable:

Over the years, banks have become a crucial and integral part of our lives. We trade our time and effort for our monthly wage and then we keep our net profits in the bank for later use; our stability and future directly depend on our banks. Therefore, most of us choose to put our money into the largest banks, which possess a lower risk of failure and provide reasonable interest rates. As a result, naturally, the largest banks grow; which are without a doubt, few.

Do you see where I’m going here?

A huge chunk of our population relies on a handful of banks. And what does one do when they’re too big to fail? They start using the high-risk high-reward strategy. 

The large banks are known for playing the game dirty. They are known for making huge gambles and chasing profits at the expense of people’s lives.

And what does capitalism do to these banks?

It crushes them! You may have heard of the fall of Lehman Brothers and AIG. These banks were hit the hardest and the American people had so many accounts in them, that their downfall meant chaos. As I said, capitalism is a game, and each entity has to face the consequences of its actions. Unfortunately, though, the government sees its job as protecting the people and these banks for the good of the economy. But the downside here is, that while protecting the people, the bailouts also ensure that such banks can make the stupidest of decisions and not face the intended consequences. 

Conclusion:

With all said and done, there is only one question left to answer: Are we building the foundation for the same mistakes again? Because although the money didn’t go to the banks, $500 billion did go to large corporations. Who knows, the banks may be the next. 

If you wish to know more about bailouts, I recommend reading ‘Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street’

FAQ: 

  1. Why isn’t quantitative easing always the solution? 

Ans) Leaving infrastructure projects aside, the securities that governments profit from are either bonds, treasury holdings, or a large number of public shares and commodities. However, the practice of quantitative easing isn’t always the solution. The 2008 crisis is a great example of this, and while our previous blog clearly explains the situation, another problem was left ignored; the government held the asset that led to the economy’s demise; the mortgage-backed security

  1. What are bonds? 

Ans) Bonds are nothing but company or government debt. Buying a government bond is lending the government some money. The government uses this money and typically pays interest twice a year. Suppose a bond is bought for $100, and the government eventually pays back the same amount of money in small amounts. This is exactly what bond maturity is; getting back the same amount of money that was invested in the bond plus interest.

  1. Which banks were hit the hardest in 2008? 

Ans) The large banks are known for playing the game dirty. They are known for making huge gambles and chasing profits at the expense of people’s lives. And what does capitalism do to these banks? It crushes them! You may have heard of the fall of Lehman Brothers and AIG. These banks were hit the hardest and the American people had so many accounts in them, that their downfall meant chaos.

Meta: This game filled with winners and losers is flawed without a doubt, and it’s time to question where our hard-earned money is going. And surprisingly, the winners are not the only ones to blame! 

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