A plan to bail out the ailing financial system to the tune of $700 billion is being considered. Critics of the current proposal point out the obvious flaws: the plan seems to involve dumping money on the problem without a clear set of guidelines and considered objectives. Also, there is concern that the people responsible for the mess will drift away on their golden parachutes, taking millions with them. This situation raises serious concerns about what should be done.
On one hand, the economy is staggering and bleeding badly, so it needs help. If the state does not step in to patch up the wounds, this giant might fall. Obviously, that would be a disaster for America and the world. Dealing with such a major disaster seems to be withing the responsibilities of the state.
On the other hand, the economy is staggering and bleeding badly because people made poor decisions. This includes the people in finance as well as the government officials who were supposed to be minding the store. When such bad decisions are made, leaping to the rescue can encourage people to keep making such poor choices. The finance people have been accused of engaging in poor risk assessment. However, if the state bails them out, then it could be inferred they made good risk assessments after all. This is because the state is stepping in to pay for their bad choices. To use an analogy, if I believe that my parents will send me money if I blow my paycheck on gambling, then that will affect my assessment of the risk. Likewise, the folks in finance probably thought that the state would dump money on them if their house of cards collapsed. It looks like they were right-assuming they thought this way. Perhaps they just acted from greed and are now just lucky that the state is going to step in.
In general, such bailouts send the wrong message. To use an analogy, suppose that everytime my husky does something wrong, I give her a treat rather than punishing her. Soon, she will be acting badly all the time. If the top financial people walk away from this mess with millions and the taxpayers are stuck with paying for the mess, then this will merely reinforce their bad behavior. This is somewhat on par with the government spending money to clean up the environmental messes left behind by companies and other similar situations. The taxpayers have been footing the bill for corporate America for quite some time-this is just going to be the biggest incident in a while.
Obviously, the companies need to be weaned off this-otherwise they will never learn to be responsible “adults” and will go on being bad “children.”