Should the Government Bail Out Corporations or Give Them Loans?

President Donald Trump speaking.
President Trump signed the CARES Act on March 27, the single biggest economic relief package in American history. (Image: The White House via Flickr)

After U.S. President Donald Trump signed a US$2.2 trillion financial package aimed at stimulating the American economy that has been stifled by the CCP coronavirus outbreak, one of the strongest criticisms against it is that it includes corporate bailouts instead of loans. Basically, the program promises to pay millions of dollars in cash to companies to help them make it through these tough times. Many argue that instead of bailouts, companies should only be extended loans.

Bailouts or loans?

“The airline industry is expected to get some [US]$50 billion in cash and loans; Boeing, which asked for [US]$60 billion, is widely expected to receive some part of a [US]$17 billion fund. And a general bailout fund of some [US]$500 billion is expected to be used for other industries, like hotels and cruise lines, whose business has dried up,” according to The New York Times.

Many airline companies have made profits in these past years. However, none of them had prepared reserves to deal with potential economic downturns. Why is that? After all, anyone with basic economic knowledge understands that just as there are good times, there will be bad times. Despite this, not saving up for a stagnant economic situation seems quite absurd, especially considering that the airline industry spent close to US$45 billion in stock buybacks in the past 8 years.

Should the government give bailouts or loans?
The airline industry has spent close to US$45 billion in stock buybacks over the past 8 years. (Image: via Pixabay)

Giving companies funds so that they can overcome their financial problems is considered by many to be a waste of taxpayers’ money. There is concern that it may promote the idea among corporations that no matter what they do, the government will funnel public money into their enterprises and save them.

Instead, they want the government to offer them new loans and announce moratoriums on existing loans. It is thought that if these companies have to repay the money, it will serve to ensure that only those who are actually capable of operating profitably will accept government help, while those who seek to leech public wealth to cover their losses will be left out.

There is also the problem of how America is going to raise US$2 trillion. “Congress doesn’t have [US]$2 trillion to spend, and 2020 tax receipts won’t begin to cover the bill. This means the federal government will effectively ‘print’ the money, likely in a circuitous way by issuing new Treasury debt and using the Federal Reserve Bank as a backstop to buy it all if investors won’t,” according to The Hill.

In the short term, the excess credit might help the U.S. economy avoid any serious trouble. However, unleashing such huge sums will definitely have a negative effect and will trap millions of future Americans in unnecessary debt.

Fintech involvement

Fintech companies have been lobbying to get a piece of the multi-trillion-dollar stimulus package. Financial Innovation Now, an industry group composed of companies like Paypal, Stripe, and Square, has asked the administration to include its members in any U.S. emergency funding program for businesses. In a letter, the group argues that they are in a better position to serve customers.

Fintech lenders like Paypal, Stripe, and Square want to be included in any emergency funding program for businesses.
Fintech lenders like Paypal, Stripe, and Square want to be included in any emergency funding program for businesses. (Image: Screenshot via YouTube)

“Small businesses are not well served by traditional financial institutions, nor will existing federal small business loan programs deliver funds soon enough… Any federal small business loan program must leverage digital advances in the marketplace to ensure that stimulus can reach those businesses most in need,” the letter states (CNBC).

Small businesses are targeted to receive US$370 billion in financial aid through the Small Business Administration. Banks are proposed to be the primary channel for distributing the loans and will earn fees through their activity.

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