Government bail-outs create credit market distortions. Those firms that receive aid will have an advantage relative to those that do not. The value of this aid creates a desire to lobby for support which is rent seeking behavior.
Many often do not care about this behavior if the haves are domestic firms and the have-nots are foreign firms. But what happens if the haves versus have-nots is a problem of two domestic firms? Look at the interesting situation between Ford and GM. Ford did not take a bail-out. GM did. GMAC needs Federal TARP money to help with dealer financing. Ford does not have access to these funds. GM now has an advantage that did not previously exist and will hurt the sales of Ford. Does this mean that Ford should get these funds? No, but the government has every incentive to have GM be successful and that means having them compete effectively against Ford in a shrinking car market.
Is this what the government intended?
Of course, the answer will be that Ford has to hire lobbyist and press their case to the government. The very fact that they have to go to Washington to explain the dilemma means that they are not focused on making an efficient car manufacturer.
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