Assignment 4: The Credit Crunch

State aid, fuel for inefficiency

If we understand correctly, banks in America have been lending money to people who could not afford a loan. To be able to give all this money away, the banks leant money from other banks, which on their turn did the same. If bankers were trying to show their children how to blow bubbles, they have certainly succeeded. The other thing they did was cause a crisis.

One and a half years later, the lack of financial backing and drop in spendable income is having a severe impact on a lot of companies. Governments are expected to come to the rescue. However, the main characteristic of a crisis is that it does not have an apparent solution. In this case, speaking of one solution is as understatedly optimistic as it is unrealistic. I believe that a crisis is ideal for a market to get rid of underperforming companies and regain healthy internal competition. This theory does suggest the market is able to solve the crisis by itself. This would make state aid, and intervention, redundant. The contrary solution to the crisis involves providing financial backing for companies that face bankruptcy, just to get them through the crisis.

I believe that the solution does not lie completely in either one of these extremes of the spectrum, and that it is up to the governments to find a consensus. To determine which companies deserve state aid, a clear distinction should be made between companies that go bankrupt during the crisis and companies that go bankrupt because of the crisis. Companies that are solely inflicted by the poor economical environment, in theory, have the right to be helped through the crisis. Because governments can than safely assume that, when the crisis is over, the company will healthily resume service, and be able to contribute to the domestic market once more. In this scenario, State aid can be seen as an investment. However, by financing unhealthy companies, you allow companies to remain unhealthy. While a crisis should form a very strong incentive for underperforming companies to increase efficiency. The increase in efficiency will provide the company with a stronger competitive position, which will have a positive affect on the market and it’s economy.

To conclude, I believe state aid is a measure governments should be able to take. However, companies should be thoroughly assessed on past performance, and cause of underperformance, before the states aid.