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A Magna Carta for Government Bail Outs
By Dennis Peacocke | January 2009
In times of stress and crisis, people, organizations, and governments need a very clear set of rules or principles for measuring decisions. For governments, their constitutions ultimately serve this purpose. Binding rules or limits help us stay out of crises, limit the negative effects of a crisis when we are in one, and lead us back to the path when we get lost in moments of extreme pressure. The current financial crisis offers us a stark example of the necessity of clear principles. Failure to use them caused the tidal wave of financial mismanagement currently afflicting us. It will only get worse if we continue with “quick fix” decisions and the inability to regroup around principles.
What follows is more than a solution—it is a “lifeboat.” It is a set of guidelines that, if not followed, virtually guarantees an even greater wave of financial destruction in the future. If that happens, our financial systems as we know them will not survive. For all our sakes, especially that of our posterity and those financially marginalized or dependent for their very livelihood upon the current financial system’s survival, to falter here is to fall into an abyss where no lifeboat will be sufficient.
Three General Principles of Governmental Financial Intervention
Principle Number One:
The opening “general welfare” clause of the United States Constitution offers the government both a “wide and narrow gate” for financial interventionism. The wide part of the gate is the possibility of intervention itself. The narrow part is that such intervention may truly only be for the general welfare, rather than any smaller part’s particular welfare. The benefits of that intervention must be carefully scrutinized and publicly justified in a compelling manner. Therefore, the government must immediately determine the industries and services whose disruption poses the greatest threat to the general welfare, establishing clear prerequisites and procedures to applying for government aid. Upon completion of these governmental studies and criteria, these findings must be published, examined, and publicly debated.
Principle Number Two:
Any governmental financial intervention is using the taxpayers’ money and their posterity’s money as a public trust. Therefore, it must be used with minimum risk and maximum opportunity to be safely returned to the people. Such investments, therefore, must come in the form of clearly regulated loans. If those receiving the loans cannot or will not agree to wise counsel for financial recovery, no public loan should be offered. Financial intervention for the purposes of nationalization without public approval is entirely out of the question, since a public debt is being incurred which requires the return of the taxpayers’ money. Financially speaking, nationalized industries do not make a return on investment and have no incentive to do so. Governments do not create capital; they create the possibility of the private sector doing so in the future.
Principle Number Three:
The general conditions upon which governmental investment can take place must be based upon the following specific agreements:
A. Senior management must take specific, personal responsibility for the condition of their organization in terms of the mismanagement leading to the request for governmental intervention. Specific mistakes must be publicly acknowledged with specific remedies given for the turnaround of the organization according to common, sound business principles. The same general principles of financial austerity which apply to companies entering protective bankruptcy should apply to the loan recipients.
B. Cuts in salary within the entire organization must be of equal percentages for all paid employees. All raises, bonuses, or stock options must be frozen until the payback schedules to the government are met. No existing company capital can be used to pay executive bonuses.
C. All government financial injections must be incrementally executed based on a company achieving the performance-based business-plan markers initially established before the loans. Labor and management wage restorations or bonuses for incremental achievement will be reviewed and set by representatives of the employees, management, and government-appointed officials overseeing the loan process.
D. The governmental loan repayment plan requires that all loans be repaid at a set interest rate determined by industry-wide standards of comparable loans from existing private sector sources. Only upon repayment of the principal and interest is the company freed of all loan-imposed obligations of governmental management. The government is not permitted to forgive loans without some form of public referendum.
If we as a nation permit current governmental officials to attempt to do this in too big a hurry to do it right or without a full congressional debate, then it should not be done at all. Governmental incompetency provides no real solution for private sector incompetency. Beyond all that, it’s the people’s money. And that is…