Bailout

Published Sep 23, 2023

Definition of Bailout

A bailout is a financial assistance package provided by the government to a company or industry that is in financial distress. That means it is a form of intervention by the government to prevent a company or industry from going bankrupt. The bailout usually involves the government providing the company or industry with a loan, a loan guarantee, or an equity investment.

Example

To illustrate this, let’s look at the 2008 financial crisis. During this crisis, many banks and other financial institutions were in danger of going bankrupt due to their risky investments. To prevent this, the US government provided them with a bailout package worth $700 billion. This package included loans, loan guarantees, and equity investments. As a result, the government was able to prevent the collapse of the financial system and the economy.

Why Bailouts Matter

Bailouts are a controversial topic. On the one hand, they can be a useful tool for the government to prevent a company or industry from going bankrupt and to protect the economy from a financial crisis. On the other hand, they can be seen as a form of corporate welfare and can lead to moral hazard.

That means companies may take more risks in the future, knowing that the government will bail them out if they fail. Thus, it is important for policy-makers to weigh the benefits and costs of bailouts carefully before taking action.