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June 17th, 2009

Is the ‘Bailout Era’ Over?

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The fact that Washington has denied federal aid to both the auto parts suppliers as well as California within a week has us wondering if the “bailout era” in this country is finished. Has Washington finally learned how to spot a bad investment or is the fear of further public backlash the reasoning behind the U.S. saying “no”?

While the cause for bailing out financial firms centered around the “too big to fail” mentality, the reasoning behind rescuing GM and Chrysler seemed to focus on their legacy as long-standing American companies and the fact that there would be a tidal wave of layoffs if the automakers folded.

In the case of the parts suppliers, it may have come down to recognizing a bad investment. Remember, the auto-parts suppliers were already given $5 billion dollars to bolster their business. Although we have been desensitized to the word “billions” it’s still a lot of money. Since the suppliers quickly returned hat in hand saying five just wasn’t enough, we’re at least a little optimistic that our lawmakers have grown weary of using taxpayer dollars to fund uncertain outcomes. As well, the return of a functioning GM and Chrysler and an uptick in auto sales will allow the suppliers to jumpstart their business on their own. But California is a different beast.

The state, whose economy is larger than Canada’s, poses an economic threat to the U.S. as a whole. California officials say the state’s economy is “too big to fail” and it can’t survive without the government’s help. Perhaps the real question we should be asking is whether California’s government is too unwieldy to be reformed?

Top state officials have gone hat in hand to the administration, armed with dire warnings of a fast-approaching “fiscal meltdown” caused by a budget shortfall. Concern has grown inside the White House in recent weeks as California’s fiscal condition has worsened, leading to high-level administration meetings. But federal officials are worried that a bailout of California would set off a cascade of demands from other states.

White House Chief of Staff Rahm Emanuel said an interesting quote last year:

“Rule one: Never allow a crisis to go to waste,” Mr. Emanuel said in an interview on Sunday. “They are opportunities to do big things.”

The pure severity of what’s going on in California has us wondering if the White House no longer sees lump sum donations as a viable solution to every problem everywhere.

“The economic fallout may be exactly what’s needed for states to conduct real fiscal reform — real change — in how they run their operations,” said HSH VP Keith Gumbinger.

Is this the end of the bailout era as we know it?

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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