To give or not to give

22 December, 2008

Big companies after your wallet

Big companies after your wallet

Via Old Holborn

I’m not generally in favour of bail outs as I don’t think they work in the long term. A company that needs a bail out generally needs it because they don’t produce anything that people want to buy. But as you’re all well aware we are living in exceptional economic times. Still I agree  the government shouldn’t bail out companies like Woolworths because they failed because it was poorly managed and another shop will take their place on the high street hopefully providing a better service to the public.

Things are not so simple when it comes to major manufactorers. I know Jaguar has been banded about as a possible recipitent of government aid but lets take the example of Airbus and Boeing. If one of these companies went bust this would result in higher prices and less choice for the consumer because the capital and skills costs needed to enter the market are so high you would be left with just one manufacturer. Government intervention can help the market function effectively in this kind of situation.

There should however be a very clear bargain between the company and government. Government will help but you will have to pay a price generally in term of a government stake which can be resold when the market gets back to normal hopefully for a whopping great big profit for the tax payer.

This is the best solution for a bad situation. If we let large strategic companies go under then we will erode our economic base. If we bail them out no questions asked, here’s the cash, come back when you need some more we will create a moral hazard and inefficient businesses that make products no one wants simply because the know they can always turn to the taxpayer. Company pain and government gain represents the best course of action to rescue companies vital to our economic competitiveness.

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