CNNMoney.com has been tracking the federal government’s commitments to bail out failing businesses and provide stimulus programs. As of May 1, the web site listed seven programs of government support: the Troubled Asset Relief Program (TARP): $700 billion; Federal Reserve rescue efforts: $6,200 billion; federal stimulus programs: $1,100 billion; bailing out American International Group (AIG): $180 billion; Federal Deposit Insurance Corporation takeovers: $22 billion; housing initiatives: $745 billions; and other financial initiatives: $1,700 billions. The total cost of those seven aid categories amounted to an unprecedented $10,5 trillion.
Surveys of public opinion, however, show many Americans questioning if and how the enormous extent of federal bailouts and financial stimuli would change the direction of America’s traditional free enterprise economy. "Replace the bailout with bankruptcy, for all of them," former House Speaker Newt Gingrich was reported to have told a class at Tulane University. "You can't have capitalism on the way up and socialism on the way down. You want to teach people around the planet, don't make stupid investments."
Gingrich wants Congress to rescind all bailouts and let the affected companies go into bankruptcy. As an affluent private citizen no longer accountable to any constituency, Gingrich can easily make radical policy proposals. One wonders what are his criteria for “stupid investments” when the economy contracts across the board? He obviously does not recognize that millions of Americans could not predict the economy’s rapid downturn.
Generally, the critics of the Obama administration’s bailout and stimulus commitments appear unimpressed by the recession’s devastating impact on low and medium income Americans: that the Dow Jones has dropped 52.5 percent since its high of 14,280 on October 11, 2007; that in March the number of unemployed U.S. residents increased by 694,000 to 13.2 million, and the unemployment rate rose to 8.5 percent; that an average house worth about $226,000 in 2006 is, adjusted for inflation, now down to a real value of only about $160,000; and that real losses in the value of U.S. houses are approaching $6 trillion.
What benefits could bankruptcy offer to failing businesses, their employees, their investors, and their suppliers of goods and services? A bankrupt business is no longer obligated to pay what it owes. Its property can no longer be repossessed. Creditors have to stop collecting debts. Utility companies are no longer being allowed to cut off service. And wages may no longer be garnished while the bankrupt business may be allowed to catch up on its repayments.
So when a court grants a business bankruptcy status, its creditors, investors, and suppliers will almost always be directly affected. By filing for bankruptcy, Chrysler, for example, has significantly diminished the leverage its lenders have. A bankrupt business usually finds it difficult to get financial assistance, or it will at least have to pay higher rates of interest.
To ease the conditions of bankruptcy, Senator Dick Durbin (D-IL) recently proposed to allow bankruptcy judges to rewrite mortgage payments, at least for troubled homeowners. After an intense lobbying campaign by the Mortgage Bankers Association, however, against what it called a “cram-down bankruptcy provision,” Durbin’s bill failed in the Senate by a vote of 45-51. Speaking also for a disappointed President, the Senator reacted angrily: "At some point the people in this chamber will decide the people we represent are not the folks working in the big banks, but the folks struggling to make a living and struggling to keep a decent home."
Obviously, the liberals at both ends of Pennsylvania Avenue do not want to litter the road to recovery with large numbers of hapless victims of harsh bankruptcies but rather offer a fresh start to all who are hurting: debtors and creditors, investors and suppliers.