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Bailout

Bailoutin economics and finance is a term used to describe a situation where a bankrupt or nearly bankrupt entity, such as a corporation or a bank, is given a fresh injection of liquidity, in order to meet its short term obligations. Often bailouts are by governments, or by consortia of investors who demand control over the entity as the price for injecting funds.

Often a bailout is in response to a short term cash flow crunch, where an entity with illiquid, but sufficient, assets is given funds to "tide it over" until short term problems are resolved. However, often bailouts are merely delaying the inevitable, as a government or investment structure attempts to avoid putting a large quantity of illiquid assets on the market, which would force other similar entities to write down their assets.

The bailing out of a corporation by government is controversial because bankruptcy can be seen as being caused by the failure to satisfy consumer demand; the bailing out is thus an instance of government intervention on the market overruling the will of consumers. "All this talk: the state should do this or that, ultimately means: the police should force consumers to behave otherwise than they would behave spontaneously." According to the Austrian School of Economics the appearance of monopolies can often be blamed on such acts of government intervention that preserve overstretched and badly managed corporations which market forces would have broken into smaller and more specialized companies.

Government bailouts of corporations are usually reserved for cases when a corporation is considered "too big to fail" - justified by the argument that failure of certain corporations would cause unacceptable short term economic repercussions throughout the economy.

Source: Wikipedia.org

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Last updated: 15 February, 2010 02:43:16