Question

During the 2008-2009 recession, many companies were recipients of government bailout money. Do you think the bailout was a good idea, and do you think the companies listed in the link above deserved the bailout money? Explain your reasoning. A yes/no/maybe answer to the question with an explanation of your reasoning. Include a detailed and accurate application of one or more of the concepts: discretionary fiscal policy, automatic stabilizers (automatic fiscal policy), incentives.

Answer 1

The US government bailout plan in 2008 was $700 billion.The collapse of Bear Stearns an investment bank and brokerage firm,American International Group an insurance colossus which was internationally famous,Freddie Mac and Fannie Mae which were two government supported mortgage lenders called for the intervention of the US government .The government had no other alternative but to bail out the financially troubled firms.

The sub prime mortgage disaster of 2008 caused Bear Stearns to collapse and the US government lend $ 29 billion to JP Morgan to purchase the firm . This move was supported by Treasury Secretary Henry Paulson and Fed chairman Ben Bernanke because the collapse of the large investment bank like Bear Stearns would cause damage to the economy of US.

Freddie Mac and Fannie Mae were also subjected to financial trouble because of sub prime mortgage . They gave loans to unqualified borrowers without verification of income and so there was huge default of these loans and the two companies sank into financial trouble . The US government then had to bail out the companies as their collapse would mean harm to the economy of US.

The government's control of the American International Group was the first ever eg of the government control of the private insurance firm . The government had to intervene when the private lenders refused to loan money to the world's largest insurance company.So the government had to give $85 billion.

Detailed explanation of one concept ie discretionary fiscal policy---

Discretionary fiscal policy refers to government action above existing fiscal policies during emergency situation like recession.This refers to non mandatory changes in taxation, spending or other government activities by the government because of certain changes in economic conditions.