Bailouts

As globalization moved the US away from manufacturing, it opened the door to new ways of making money. It was not by making things but just moving money around. This led to leveraged buy outs, hedge funds along with mergers and acquisitions. In a hedge fund a group of investors pool their money and use that to buy and sell businesses. They increase their buying power by using their cash as collateral to get larger loans, a process called leveraging. When things are going well this allow them to amplify their profits but when things turn down it creates large losses. When that happens, they have to come up with cash and often times they are leveraged so high, they are unable to do this and go into default. Many of these hedge funds now find themselves in that position and will be looking for a government bailout, similar to what happened in the 2008 mortgage crisis, where the government bailed out the big banks. These funds were popular because they were not regulated like public funds and many took risk that would not have been allowed, if they were public because public funds are monitored by the Securities and Exchange Commission. Now they will once again reap the profits when things are good and expect the government to cover their losses when thing go bad. This type of government activity causes what is called a “moral hazard” meaning people will take higher risk, knowing they are covered in case of loss