The interference by the US government in order to help large firms or states facing financial crisis is a crucial undertaking because the failure in this regard affects the economy adversely. In this regard, the government promotes measures that channel financial aid to firms or states in need of help. History demonstrates that the US government has participated in bailouts for various American corporations and states. In 1971, the Lockheed Corporation faced numerous financial challenges.
The anticipated failure of the corporation meant that a large number of people would become jobless. In addition, the corporation’s failure would affect America’s gross national product and its defense system. However, Lockheed could pay off its various debts because of a bailout realized through the Emergency Loan Guaranteed Act passed by the Congress. In the 1970s, the New York City entered a period characterized by numerous financial problems.
In response, the US government provided an estimated $2.3 billion to the city in terms of loans. The New York City Seasonal Financing Act enabled New York to obtain the largely needed financial aid. The 9/11 terrorist attacks in the United States affected the airline industry negatively.
Various airlines incurred considerable financial losses due to the mandatory grounding of aircraft because of terrorist attacks. In this regard, the Bush administration passed into law the Air transportation Safety and Stabilization act that introduced various forms of compensation for the affected airlines.
The provision of financial assistance to businesses and states presents various opportunities. First, it creates an opportunity that allows the company of concern to remain within the industry to avoid causing any significant effects on other related entities. Thus, a country may grant subsidies or loans at low rates to a company in order to ensure that all the vital industries continue to function in a manner that promotes the sustenance of the economy.
Furthermore, such an approach cushions the economy from various ripple effects whose outcomes are undesirable to a country. In this regard, the government can control unemployment rates and other costs such as welfare expenses due to reduced livelihoods.
Bailouts provide companies and states with an opportunity to evaluate various aspects concerning financial management. In this regard, companies or states can adopt policies that promote the effective use of funds, and eliminate policies that increase chances of financial crisis. Furthermore, bailouts provide the government with an opportunity to benefit from loan fees.
The advocates for the free market oppose the intervention by the state on matters relating to the economy. In their opinion, the provision of financial aid to companies or states encourages them to perform poorly. Another consideration among the free market advocates is the government’s influence on the normal functioning of various market forces.
The funds utilized to rescue companies or states should go back to the treasury once the bailout beneficiary has regained financially. However, not all the companies or states that receive financial assistance attain full recovery. Some companies become bankrupt leading to the loss of public money.
Another challenge is cases of disagreement between various parties involved in the setting up of a bailout program for a certain company or state. For example, although the Penn Central Railroad was in dire need of financial assistance, disagreements between the administration and the Congress led to the eventual failure of the corporation.