Bailouts: too big a crutch?

In 1971, the government bailed out Lockheed Aircraft Co., which was then the third-largest commercial aircraft manufacturer but the nation's largest military contractor, with $250 million in loan guarantees. In 1979, Congress provided loan guarantees of as much as $1.5 billion for ailing Chrysler Corp., the No. 3-ranked U.S. automaker. After the Sept. 11, 2001, terrorist attacks the airlines received $5 billion in cash and $10 billion in loan guarantees to tide them over the slump in air travel.

Some experts fear that government investments in the open market could artificially support market prices, thus creating a "moral hazard" that investors will make unduly risky choices, assuming that government intervention will limit their losses.

That's a concern presented by the Treasury's plan to buy mortgage-backed securities issued by Fannie Mae and Freddie Mac and take a large stake in AIG.

"They're essentially saying they're going to put a floor under the market," says John Lapp, a professor of economics at North Carolina State University. "That's just begging for excessive risk-taking."

Others say that bailouts can be good medicine for ailing industries, particularly when they're coupled with strong incentives to improve. It is widely assumed in Washington that the financial-industry bailouts will lead to tighter regulation of investment banks.

On occasion, the government may turn a profit on a bailout. Chrysler's recovery netted Uncle Sam about $300 million.

In any case, the bailout debate may help focus Americans on what industrial policies are proper for today's world.

"It doesn't take a genius to see that the auto industry has had a very bad time," economist Bernstein says. "Now we can all get together and decide whether we want an auto industry, and what kind."

Demands for government help will probably never go away, he adds. Loosely paraphrasing the opening line of Leo Tolstoy's "Anna Karenina," he observes: "All happy companies are alike, but every unhappy one wants a bailout."

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michael.hiltzik@latimes.com