Wednesday, September 17, 2008

Explaining Government Bailouts

The recent events surrounding government bailouts of Fannie Mae, Freddie Mac, and A.I.G. are difficult to both understand and explain because the normal person knows so very little about what these firms actually do.

Thus, it might be best to explain it using the historical example of Chrysler, which was bailed out in 1979. Everyone knows what Chrysler does: they make cars. Yet the justificiation and impacts of the bailout are similar regardless of whether the firms produce a tangible car or intangible investment instruments. The Chrysler story is interesting, as told by David Leonhart in the NY Times, which can be found here.

Congress bailed out Chrysler, which means the subsidized loans were paid for by taxpayers. AIG is being subsidized by the Federal Reserve, and I think (and I am going to ask around to see if I am right) [note: it turns out that the Fed will not print money to pay for this...the government will borrow the money...I guess the Fed doesn't want to cause greater inflation rates] that since the Federal Reserve has the ability to "print money", taxpayers will still pay for the bailout, but through higher inflation rates, not taxes.