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A tale of two bailouts

By Tyler S. Clark (Contact)

Published March 23, 2009

It was the blue-collar workers, it was the white-collar workers. One class was only grudgingly granted a lifeline, the other was a shoo-in.

Google [Detroit bailout] and you'll find headlines like

  • "The Detroit Bailout: Unsafe at Any Cost"
  • "Big Three Bailout? Not So Fast"
  • "No Detroit Bailout"
To this is attached all kinds of advice about what must be attached to any bailout of the Big Three, such as environmental overhauls and worker wage concessions. That's from those who were willing to concede a bailout could be tolerated; others advised bankruptcy.
The headlines screamed the discrepancy in hourly labor costs between GM and Toyota of around $21. What was talked about less was how the numbers break down. The true difference in hourly wage between those workers is closer to $4. The remaining amount is the difference between a hundred-year-old company supporting its pensioners and an upstart, founded in 1986, without those responsibilities.
Whatever your thoughts on the automakers' bailout, the difference between the government's attention to its details and those of the spending on AIG couldn't be more different. The discussion of the AIG infusions before they happened were whispers, in comparison.
In our post-industrial world, once again, blue-collar workers are unworthy of help and suspected of not working hard enough, but white-collar workers are essential to the new economy and above reproach. Only once outlandish retention bonuses were paid was there an outcry of unfairness. But the ensuing discussion still does not get to the root of our modern prejudice against the working class.
Nobel Prize-winner and Columbia economics professor Joseph Stiglitz gets the last wordhere:
"There is a basic principle in environmental economics called "the polluter pays": polluters must pay for the cost of cleaning up their pollution. American banks have polluted the global economy with toxic waste; it is a matter of equity and efficiency that they must be forced, now or later, to pay the price of cleaning it up. As long as the banking sector feels that it will be bailed out of disasters--even ones it created--we will continue to have a moral hazard. Only by making sure that the sector pays the costs of its actions will efficiency be restored." 



1LB(18 comments)posted 5 years ago

Where is it? Is there a problem with the link? Is this entry lost?

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2tylersclark(182 comments)posted 5 years ago

I really hate this WYSIWYG sometimes. I thought I had checked it after posting, but I must have changed it later. Thanks for letting me know. You should see it fixed now.

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3Erplane(447 comments)posted 5 years ago

Hey Tyler -

Well, I do agree that Detroit should be logically bailed out. I say logically b/c I am not sure Chrysler has what it takes to be truly considered a going concern and maybe shouldnt be. But regarding AIG, it had to be bailed out. The govt injected alot of money into AIG, but it did so knowing those funds would not stay at AIG but rather be dispersed as regular course of business payments to other financial institutions who were counter parties to AIG (including local and state governments). Had AIG failed, there would have been significant and global reprocussions that would have made Lehman look like a school project gone bad. So I know that in absolute terms, the dollar amounts seem staggering, but it was a neccessary evil.

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4tylersclark(182 comments)posted 5 years ago

Hi Erplane, I'm not necessarily arguing the do-we-or-don't-we. I'm looking at how we approached them and what that says about our society. And I don't think the answer lies just in the respective necessity of each situation. Thanks for your comments, as always.

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5cambridge(2918 comments)posted 5 years ago

I agree with Erplane also. I think the answer for this not happening again is that if it's to big to fail it's to big to exist. AIG should be broken up into smaller companies. I don't know what the amount of economic wealth a single company should be able to control but it should never be enough to through the economy into a nose dive and cause world wide economic problems.

Not long ago ATT was a major player in telecommunications. The result was very expensive and poor service. The company was broken up into seven companies I believe. That brought about competition in both technology and service. It also created thousands of jobs. The result is that we now have much better service and it's also less expensive. Everybody wins.

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6cambridge(2918 comments)posted 5 years ago

I spelled throw wrong.

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7Erplane(447 comments)posted 5 years ago

Thanks guys. The sad part about AIG is that it was a 'small' division that created this CDS product and after they became a cash machine, management turned a blind eye to proper risk management. The global insurance biz was strong and stable, and was very reputable worldwide, esp in Asia. Now its sad that these assets will be sold to foreign buyers. AIG will be broken up.

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