Something unprecedented is coming. Congress has no choice but to hold its nose and approve bailouts for giant companies such as Boeing, Marriott and other hotel companies, all U.S. airlines and perhaps hundreds or thousands of other companies suddenly under severe financial stress.
The Trump administration has proposed $50 billion in loans for reeling airlines that suddenly have no passengers. Other travel industry firms are in the same sinking boat and lining up for similar aid. There will be hundreds of billions of dollars in aid for smaller businesses, and outright checks for ordinary Americans. Congress must approve all of this and probably will by April.
But there are right ways and wrong ways to do bailouts, and the 2008 financial wipeout was a crash course in what to do wrong. Back then, officials in the Bush administration, and the Obama administration after them, knew they had to flood big banks with money to keep the financial system from seizing up. Banks are the circulatory system of the economy, and without them, the patient is dead. But the effort to save the financial system back then was so frenzied that policymakers orchestrating bailouts and Congress passing the necessary laws overlooked many safeguards.
Insurance giant AIG, which would have collapsed without the biggest private-sector bailout of the financial crisis, still awarded $454 million in bonuses to employees for 2008, with Congress powerless to intervene because it put nothing in the bailout law to prevent such payouts. In 2009, Wall Street banks literally saved by U.S. taxpayers issued $20 billion in bonuses to traders and executives, a 17% jump over 2008. Wall Streeters justified the bonuses by saying they still had to pay for talent in a competitive market. As the unemployment rate spiked to 10%, millions of Americans felt justified outrage and demanded to know, where was the bailout for the little guy?
Bailout lessons
An underlying assumption of the 2008 bailouts was that if Washington saved the companies, the companies would save the jobs. But they didn’t. It would have been far worse if banks and insurance companies and automakers had gone out of business, but the number of unemployed still doubled from 2007 to 2010, to 15 million people, with millions more squeaking by on fewer hours and far less pay. It took more than six years for employment to reach pre-recession levels, the slowest labor-market recovery in modern times. Congress did pass other safety-net programs, but most of them didn’t put people back to work, badly tainting the bailouts for businesses.