In March, Congress passed the CARES Act, which sets aside US$2.2 trillion for stimulating the American economy at a time when the CCP coronavirus outbreak has put a stop to growth. This seems similar to the US$700 billion bailout program introduced by the Federal Reserve during the aftermath of the 2008 Financial Crisis. This bailout program ended up benefiting corrupt banks and corporations. Unfortunately, this seems to be repeating with the currently announced stimulus package.
The bailout problem
The 2008 crisis was triggered due to the uncontrolled greed of lending and investment institutions that created and sold financial products that had too much risk. Though some of these institutions went down, most of them survived by leeching off of the taxpayer’s money handed by the government as bailouts and economic stimulus.
By 2009, corporate profits had started to rise again and the financial institutions showed signs of stability. In contrast, the median household income stayed below the 2007 level for almost 10 years until 2016. Big bucks of big players at the expense of the citizens!
The current US$2.2 trillion package comes with a little secret — it can end up costing America $6.2 trillion. This is due to the fact that US$454 billion has been earmarked for Federal Reserve-based corporate loans. The Fed has the power to leverage or multiply money it receives from the Treasury up to 10 times.
As such, instead of US$454 billion, the government could end up lending up to US$4.5 trillion to banks and corporations. In contrast, individuals, small businesses, and other groups will only receive US$1.4 trillion in support. For every $1 spent to support them, the administration can potentially spend more than 3 times for the big boys.
What makes the situation even worse is that the small businesses will have to jump through numerous hurdles to get their share of help. The government has handed out the task of disbursing the US$349 billion Payment Protection Program to private banks. These loans are targeted at small businesses that are struggling due to a cash crunch induced by the CCP coronavirus. Unfortunately, small business owners are getting stuck in a bureaucratic nightmare in order to get what is rightfully theirs.
“I’ve been banking with [Bank of America] for 15 years, I have a payroll account with them and a checking account, but not a lending relationship. When I logged on, it said you’re not eligible because you do not have a credit card or lending relationship… They caved to online pressure and by Saturday morning they were letting us apply, but it will go in order of priority, so now I think I’m at the bottom of the list,” a small-business owner told Yahoo Finance, as reported by Barron’s.
The U.S. government is repeating the mistake of the 2008 crisis by saving banks and corporations that do not deserve to be saved. Profits and losses are a natural part of a capitalist system. Those who are unable to continue making profits should be allowed to naturally die off so that other efficient alternatives can come in their place. But by bailing them out, the U.S. is basically saying — if you make a profit, you keep it, but if you make a loss, we will compensate for it.
In short, capitalism when businesses are striking it rich and socialism when they are in the red. This is basically crony capitalism let loose. Now, compare it with what honest Americans who have dutifully paid their taxes through the years get in return. The US$2.2 trillion package will provide $1,200 per person provided that they do not make more than $75,000 per annum. If you earn more than that, you will earn $5 less for every $100 you make above the $75,000 cutoff.
So a person making $38,000 per year not only has to pay just 12 percent in taxes, but can also get the full $1,200 in benefits promised under the coronavirus package. In contrast, people who earned $100,000 and paid their 24 percent in taxes will not get a single penny. These people have the same financial worries as the poorer folks and yet are denied any financial support because they make more money. The only good news for them seems to be that the administration has allowed delaying the payment of taxes for the current term.