Government bailouts – conclusion

The necessity and impacts of government bailouts have been widely debated especially after the widespread bailouts witnessed in the recent financial crisis. While it has been advanced that at times bailouts serve to perpetuate moral hazards in organizations that are considered “too big to fail” proponents of bailouts have argued that failure to bail out such organizations in brink of collapse could adversely affect a country’s entire economy. When the necessity for bailouts has been established then the government has a number of options to effect such options. One of these discussed has been providing the company funds in exchange for its stock – a method of nationalization. This however has been noted to affect the capital markets operations in adverse way. Secondly the government can purchase an organization’s debt and recover these funds later after the organization goes back to profitability. In such cases the ideal strategy would be the purchase of the debts at discounted fair market rates that take cognizance of the company’s liquidity levels. This however could have a greater implication since such discounted rates of the organization’s debts could still leave the organizations with a significant debt from which they cannot recover thus befitting the purpose of the bailout.

Optimally any bailout plan should be aimed to correct the antecedents that lead to the collapse of the organizations involved. One way that such as been advanced has been through the provision of incentives that allow accurate reporting of bad debts. Such has been discussed to be achievable via the purchase of the failing organizations debts rather than stock. With such purchases it has been advanced that mangers would be lured to report the entire value of their debts thus allowing for bailouts at earlier stages rather than when these have a widespread detrimental effect on the economy. The ultimate solution for organizational failure however would be the strengthening of regulatory organization to dissuade unethical practices that could result into massive failures.


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