RESOLVED: Federal Government Bailouts of Major Corporations Are Just

West Coast Publishing

Spring 2009 UIL LD—Government Bailouts

Table of Contents

SECTION 1: TOPIC OVERVIEW......

A. History and Background......

B. Philosophical and Moral Concepts......

C. Affirmative Strategy......

D. Negative Strategy......

SECTION 2: RESOLUTIONAL ANALYSIS......

SECTION 3: ANNOTATED BIBLIOGRAPHY......

SECTION 4: SAMPLE AFFIRMATIVE CASE AND EXTENSION......

MARKET BAILOUT WAS AN ECONOMIC NECESSITY......

MARKET BAILOUT PREVENTED A CREDIT LIQUIDATION CYCLE......

A U.S. ECONOMIC COLLAPSE WOULD BE DISASTROUS......

ECONOMIC GROWTH IS ESSENTIAL FOR DEMOCRCY AND SURVIVAL......

MARKET BAILOUT WAS IN THE PUBLIC INTEREST......

CORPORATE BAILOUTS ARE ESSENTIAL TO A GOOD ECONOMY......

CORPORATE BAILOUTS DO NOT UNDERMINE DEMOCRACY......

AN AUTO INDUSTRY BAILOUT PREVENTS ECONOMIC COLLAPSE......

DEMOCRACY PROMOTION IS A FAILED ENTERPRISE......

ADVANCING THE INTERESTS OF DEMOCRACY IS DISASTROUS......

UTILITARIANISM/CONSEQUENTIALISM SHOULD DETERMINE THE “JUST”......

UTILITARIANISM/CONSEQUENTIALISM PROTECTS RIGHTS......

EXTINCTION AND NUCLEAR WAR SHOULD BE OUR TOP CONCERN......

CAPITALISM IS JUST......

CORPORATIONS ARE KEY FOR ENVIRONMENTAL PROTECTION......

SECTION 5: SAMPLE NEGATIVE CASE AND EXTENSION......

BAILOUTS ENCOURAGE UNJUST BUSINESS PRACTICES......

UTILITARIANISM DOES NOT JUSTIFY CORPORATE BAILOUTS......

UTILITARIANISM/CONSEQUENTIALISM IS A POOR STANDARD FOR MORALITY....

UTILITARIAN SURVIVAL POLITICS DESTROY THE VALUE TO LIFE......

MARKET BAILOUT BENEFITS ONLY THE RICH AND POWERFUL......

MARKET BAILOUT WILL NOT HELP THE ECONOMY......

BAILOUTS UNDERMINE DEMOCRACY......

BAILOUTS ARE UNCONSTITUTIONAL......

THE PUBLIC OPPOSES CORPORATE BAILOUTS......

CORPORATE BAILOUTS ABUSE TAX PAYERS......

BAILOUT FUNDS SHOULD GO TO PUBLIC WELFARE......

THE GOVERNMENT HAS AN OBLIGATION TO TAXPAYERS......

THE GOVERNMENT SHOULD PRESS FOR REFORM, NOT BAILOUTS......

DEMOCRACY IS ESSENTIAL FOR PEACE AND STABILITY......

SECTION 5: ESSAY NOTES......

RESOLVED: Federal government bailouts of

major corporations are just.

W. James Taylor

Emporia State University

“The question is how we will get there: Will we mindlessly follow the historical pattern of a violent collapse of the inflationary credit pyramid built up over the past thirty years, condemning an entire generation to the miseries, uncertainties, and dangers of another Great Depression? Or will we find the collective will and wisdom to manage our affairs well enough to avoid a repetition of that terrible time?”—Norman A. Bailey, Professor at the Institute of World Politics[1]

“Money does not just fall from the sky. Ultimately it comes out of people’s pockets. If the government pours money into some industry that is in distress, it must first take the money from some place else.”— Robert W.McGee, Director for the Center for Accounting, Auditing and Tax Studies at Florida International University[2]

SECTION 1: TOPIC OVERVIEW

This section begins with a general history of corporate bailouts. Afterward, I will outline general philosophical arguments involved under the topic, as well as arguments and strategies for defending both sides of the resolution.

A. History and Background

With the flurry of controversy surrounding the Wall Street and auto industry bailouts, it might be surprising to learn that our government has engaged in such activity many times. In 1917, the government outright seized the railroads to make sure goods, weapons, and troops were able to easily move across the country to support our efforts in WWI. After the war in 1920, the government returned the railroads to private ownership and compensated stockholders. However, this “bailout” was targeted at helping the war effort, not so much the railroads themselves. A similar effort was made during WWII when the government seized dozens of companies to secure wartime needs. In 1952, President Harry S. Truman seized most steel companies in the U.S. His rationale was premised on the notion that uncooperative owners would soon foster an industry wide strike that would cripple our efforts in the Korean War. The one common element in all of these that stands out is war. During these periods, the federal government “nationalized” these industries.[3] Here we see that bailouts began under a rather expansive definition and scope, rather than the “corporate” bailouts we see being discussed in Congress today.

Current bailouts, though, are not without precedent. The modern notion of “corporate bailout” began most prominently in 1979 when the federal government stepped in to aid Chrysler.[4] On December 20, 1979, Congress passed the “Chrysler Corporation Loan Guarantee Act of 1979" (Public Law 96-185). This measure aimed to prevent the automobile manufacturer from declaring bankruptcy by providing $1.5 billion in loans. In the words of Karl Marx, “History repeats itself, first as tragedy, second as farce.”[5] As I write this essay, Chrysler just closed down production today due to financial turmoil and a denied bailout request.[6]

Ten years later, the federal government stepped in to bail out failed savings and loan firms (dubbed the “S&L crisis”). This was a massive economic undertaking by the federal government to rescue 747 S&Ls.[7] In the end, the government spent over $100 billion in loans. After these banks repaid their loans, the government still lost $40 billion in taxpayer funds.[8] Given this year’s bailout of financial institutions, commentators have often drawn parallels between Wall Street and the S&L crisis. However, NPR analyst Eric Weiner sees an important distinction,

In fact, the kind of bailout being discussed for the subprime lenders and borrowers is very different from the one that, say, was put together in the 1980s to rescue the failed savings and loan industry. That bailout involved taxpayer money; this one does not. Rather, under discussion are changes to the bankruptcy laws, the rules that govern the Federal Housing Administration or action by the Federal Reserve.[9]

Weiner argues that the current bailout is more extensive in that it affects the rewriting of major financial laws. In contrast, the government made direct loan guarantees to banks to resolve the S&L crisis. Either way, it was the taxpayer who ultimately paid the price.

Shortly after the S&L bailout (although some contend it extended from the early 1980s to the 1990s), the government reached out to Continental Illinois Bank and Trust.[10] In 1984, the FDIC guaranteed billions in loans. Even the bank itself warned the federal government that it stood to losebetween $1.39 billion and $1.71 billion on the loans—and they did.[11] What is most important about this example is the precedent it set for banking and loan procedures. Although it did not come to fruition for Continental Illinois, the idea surfaced to shed all the bank’s bad loans into a separate company that would be owned by Continental Illinois and the FDIC.

A growing number of banks are utilizing a novel approach to shed their bad loans: They are putting them into a separate unit and then spinning the unit off to shareholders. With the Federal Deposit Insurance Corporation viewing the approach as a way to lessen the costs of dealing with troubled or failed banks, the creation of these new ''problem loan banks'' is almost certain to accelerate, according to banking officials and analysts. Because this approach could pave the way for otherwise unsalable troubled banks to be acquired by healthy institutions, hundreds of these banks might not have to be liquidated. That is good for the banking system, Government officials and analysts say.[12]

However, the idea was not as successful as those government analysts believed. Bank failures only continued during the 1980s and 1990s. Several other banks failed, but the approach helped soften the blow to the economy and taxpayer.

The next major bailout came shortly after the terrorist attacks on September 11, 2001. The fact that terrorists used commercial airline jets to carry out their plan sent shockwaves that the airline industry. All flights in America were shut down for several days at a huge economic loss to the airlines. Airports were flooded with passenger unable to travel. Once they reopened several days later, lines for ticketed passengers were several miles long at most major airports. Over 100,000 employees were laid off. But the most overwhelming cost came in the form of immediate and subsequent security upgrades. The government stepped in with a $15 billion bailout. This included $5 billion in cash and $10 billion in loan guarantees.[13] It is important to recognize that the airline industry was not in financial trouble because of bad business practices. Alan Gottlieb, President of the Center for the Defense of Free Enterprise, explained that the industry was not responsible for its financial status and that the industry was absolutely essential to national security.

Our feeling is that, since airlines were ordered out of the skies by our government, we don't have a problem with the intent of this, philosophically…This act of terror – you could call it a war – used the airlines' property as a weapon, and they should not be made to suffer financially for that…. the commercial air fleetin this country is the reserve military air fleet at the same time, under federal law. So I understand the importance of the commercial air fleet to our national defense system.[14]

Bailing out the airlines after a terrorist attack seems like an excellent example for the Affirmative. Since the federal government ordered them to shut down, one can argue that the federal government has a clear obligation to offer financial remedies. This is similar to the nationalization schemes undertaken for wartime purposes previously mentioned.

All of these efforts combined pale in comparison to the 2008 bailout of financial institutions (“Wall Street”). The Emergency Economic Stabilization Act of 2008authorized the U.S. Treasury to spend up to $700 billion to purchase failing assets from major lending institutions (“subprime mortgages”) such as AIG, Fannie Mae and Freddie Mac. According to government officials and some leading economists, allowing these firms would send a ripple effect through the entire economy—like knocking over dominoes until the entire system collapsed into another Great depression.[15] Secretary of the Treasury Henry Paulson’s plan was to buy up all the bad assets, thereby reducing financial uncertainty and restoring confidence in the market.

Paulson’s plan of action passed under the Emergency Economic Stabilization Act of 2008 included setting upthe Troubled Assets Relief Program (TARP). This program allows the federal government to purchase failing targeted assets of businesses, such as banks and other financial institutions to prevent bankruptcy and default. Additionally, TARP allows the Treasury to directly inject these firms with equity investments and purchase bad loans.[16] In using taxpayer funds, TARP functionally makes every American an investor in the market.

At the time of the bailout, the U.S. economy was already suffering from unusually high gas prices, which in turn, raised the price of almost everything. The economy was a hot button issue as well in the presidential campaign. The American public was enraged to think they would have to pay for shifty banks and poor business practices, with just cause.

But Fannie and Freddie, driven by the ever-present profit motive, were able to exploit their regulatory privileges to an extraordinary degree, and in ways predicted by no one. They have also been able to duck and weave through their negative publicity over the years in order to maintain this regulatory privilege. And they will continue to do so until there is a major financial crisis or until Congress focuses sufficiently on the massive risks that these entities pose to the federal budget and the American taxpayer.[17]

Since institutions like Fannie Mae and Freddie Mac caused this crisis by artificially creating excess credit and debt, many argued that infusing more credit and debt through the bailout was the wrong answer.[18] But if these actions helped stave off a cycle of credit liquidation (businesses selling off assets out of dire financial need) we would be repeating the same dynamic that occurred during the Great Depression.

While many Americans looked at the bailout as a blank check to bad businesses, this is misleading. The bailout package included what is known as a “sunset clause.” This refers to provisions of laws that terminate a portion of the law after a specific date. Only further legislative action can extend those actions defined in the law. The Emergency Economic Stabilization Act of 2008 contains a three year sunset clause in which the government would no longer access funds from TARP. Steven Lohr of the New York Times explains,

Will the move presage a more forceful government hand to control financial markets or will it be a brief stint as capitalism’s protector? The package does call for the government investments to be in three-year securities that the banks can repay at any time, when markets settle and conditions improve. “This is clearly a crisis measure in crisis times, but it’s a good thing there is a sunset provision that limits the length of the government’s investment,” said Richard Sylla, an economist and financial historian at the Stern School of Business at New York University.

So while the government uses taxpayer funds to bailed out failing banks and lending institutions, there was no blank check. Moreover, these institutions are required to repay the loans.

After a long history of corporate bailouts, America is in the midst of yet another impending bailout, this time for the automobile industry. Detroit automakers Ford, Chrysler LLC, and General Motors (sometimes referred to as “the Big 3” or simply “Detroit”) have petitioned Congress to access $15 billion of the TARP funds to prevent their collapse.[19] Congress denied a bailout package for the Detroit automakers in early December, but President-elect Obama has promised immediate action after his inauguration if the current Administration cannot reach a deal. Why bail out Detroit? These three automakers play an intrinsic role in the U.S. economy.[20] Debaters should pay close attention to the events of the next few weeks and months to developments on this issue.

B. Philosophical and Moral Concepts

This subsection discusses several philosophical concepts relevant to the resolution. Most Lincoln-Douglas debaters will largely be aware of these concepts in general.

Utilitarianism/Consequentialism

These ideas refer to employing a cost-benefit analysis of a given action. In short, the greatest good for the greatest number should determine what is “just”. Although there are differences between the two concepts, many authors use these almost interchangeably. If the Affirmative can prove that more harm than good would come from not bailing out corporations, then bailouts would be just.

Democracy and the Social Contract

In a democratic society, the people vest the government with certain powers and authority. In return, the government has an obligation to protect the general welfare of the public. Under this resolution, this idea cuts both ways. For the Affirmative, the economic necessity of the 2008 financial bailout speaks to that general welfare. If the economy were to collapse, the public would suffer infinitely more than the usurpation of their tax dollars. For the Negative, bailouts break the social contract and signal a retreat from democracy. The question here pertains to the right of the government to use taxpayer funds to help corporations, not the effects it would have on the general welfare.

Libertarianism

Thinkers such as Ralph Nader decry federal government action to bail out corporations. For Libertarians, the very idea of taxation is unjust. This mirrors the Negative side of the democracy and social contract debates. If the Negative wins that taxes themselves are unjust, then their use in corporate bailouts are likewise unjust.

Life—Quality vs. Sanctity

This is an age-old debate that often reflects a dog chasing its tail, or the preverbal “chicken before the egg” paradox. However, many debaters have used these concepts quite effectively. The “sanctity” of life refers to the preservation of biological life itself—survival. Many argue that without life, all other values and ethics are irrelevant. The opposing side argues that a fixation with survival or maintaining biological life comes at the exclusion of attaining a life worth living. For example, if one is allowed to live a long life, is it a life worth living if they are incarcerated in prison?

C. Affirmative Strategy

This resolution asks the Affirmative to prove that corporate bailouts are “just”. In doing so, the Affirmative must first identify a means by which to determine what is just. Under this resolution, pragmatism guides this evaluation. In the sample case provided, the criteria chosen is consequentialism. Recalling that this refers to weighing the relative costs and benefits of bailouts, the Affirmative relies on defending the particular bailout (or bailouts in general) as more beneficial to the general welfare than taking no action.