Government Bailouts and Business Failures

I heard a story one morning while driving into work regarding one economist’s point-of-view on why the government is going about in the wrong direction in terms of handling business failures (in particular, AIG’s failing). I thought that the solution was very well put that it was worth mentioning (despite the fact that this economist was an advisor to both President Bush and later McCain). Let AIG fail. Other big businesses close to failing should fail. This is the gist of the solution. The specifics, however, are what was worth mentioning. He was proposing that what the government should do is in a controlled manner sell off the assets from the failing company to other smaller businesses. What this would do is:

  • Help pay off the failing company's debts
  • Help spread the liabilities of the failing company across smaller companies in a more manageable fashion
  • Help strengthen and add additional assets to smaller businesses
  • Puts many more smaller businesses in a better position for growth, resulting in the potential of a greater number of jobs than the big failed company

The idea behind this is giving small business a chance to thrive in this tough economic time, helping to get us out of the recession (my opinion: the depression) in a quicker fashion. More jobs would be created, the small businesses would grow, and the larger business that had close or exclusive ties with other businesses would not be in any further position to cause large economic failures like happened when AIG failed.

Should a small business that buys up parts of the assets fail, the repercussions would be much less than that of a large company such as AIG failing. The likely case would be that a much smaller percentage of people investing in the stock market would be affected, businesses with ties to this small business would be smaller and the fallout with them would be reduced, etc.

In all, this solution seems like a win-win for businesses except for the failing one. However, in all fairness - AIG got themselves into this predicament, and if the government would have just let them fail, all of the employees (including the executives of that company) would be without a job right now. But, if the government wants to be fair with the tax payers’ money, they would be wise to look at this approach to help bolster small business and help get us out of this tough economic time.