January 10th, 2018
Analysis of government bailout options
An analysis of the available options for structuring government bailout options helps in determining the optimal structure of the bailout plan. One of the considerations for bailouts has been the method through which the government raises the funds for which it intends to bailout the organizations with. Panageas (2009) for instance proposes an optimal taxation of labor incomes to fund government bailouts. In the model taxes raised are advanced to finance transfer payments to the entity being bailed out rather than funding “exogenous government expenditures” (Panageas, 2009, p. 102). A model that proposes taxation of persons not directly involved in the collapse of entities has however been argued to be inappropriate for funding government bailouts (Albuquerque, 2009).
In structuring the bailout of failing institution the option that alleviates the causative factors of collapse would be the best approach. Aghion, Bolton and Fries (1999) for instance note that in structuring bank bailouts it would be critical for the governments involved to give requisite motivation for managers to liquidate non-performing loans. Debt buyouts in such cases could act as incentives for disclosure of non-performing debts thus allowing early preventative measures to be adopted (Aghion, Bolton & Fries, 1999). A contentious issue however relates to the amount at which these purchases would have an ultimate beneficial effect. While the purchase of the organization’s debts at liquidity adjusted fair market values would be an ideal solution (Weiss & Larson 2008) the fact that such funds might prove inadequate in the long run makes such a purchase lose its purpose. In scenarios where bailouts are to be carried out through buying of the entity’s debts then full purchase of these could allow the organization to recover hence enable it to repay the advanced funds. On the other hand, bailout plans that involve buying the organizations bonds could interfere with the capital markets thus affecting the recovery period for such markets (Weiss & Larson 2008). In this latter scenario the purpose of the bailout would then be defeated.
The ultimate solution for bailouts however would be to strengthen the organizations charged with performance monitoring. Strengthening such institution would not only help early identification of failure candidates but would reduce the motivating factors for imprudent behavior in organizations (Weiss & Larson, 2008). Incase of financial institutions the increase in deposit insurance would for instance weed out the entities that have adverse liquidity rating thus preventing massive collapse of the industry. Further prudent government policies that allow the equilibrium between saving and risk-taking behavior to be maintained would be an important preventative measure against overwhelming corporate failures. Go to conclusion.