Wednesday, 11 February 2009

Bailout for Charities – Right or Wrong ?

Yesterday, the British government announced a bailout for charities of about £40m. Every group is now clamouring for a bailout. Where will this end ?

The argument of the charities is simple. If the government can give £500bn to the bad boys in the banks, they can give something to us. The charities asked for £500m, were prepared to settle for £100m, and got £40m. They have promised to come back and ask for more.

The justification for asking for the bailout was that donations had come down by 13% consequent to the financial crisis. If they did not get the money, they would have to lay off staff. Hence bailout.

Am I missing something here ? Charities are supposed to be funded by voluntary donations. The operating word – voluntary. Does a 13% decline warrant a bailout when most industries routinely handle declines of this nature ? Have the charities really explored all avenues of cost reduction and revenue increase ? For example, Oxfam is reporting that sales of its products is increasing as consumers downtrade. And are layoffs in not for profit organizations somehow worse than layoffs in for profit ones ?

The charities say that lack of funds precisely at a time when the public needs more of their services is disastrous. Charities associated with counseling people who have lost jobs and those that deal with the elderly are at the forefront of this argument.

I think the queue of industries and sectors that are lining up for the dole is because governments lost the PR debate in the case of the assistance to banks. In fact it was a gross PR debacle to allow the assistance to the financial sector to be called a bail out. It was not a bailout and governments should have explained better what they have done. They has provided assistance either as loans (with high interest rates) or picked up shares in banks or even outright nationalized them. Even where they will pick up the dead assets of banks ( (the “bad bank”), they are writing off loans to individuals who can’t pay; not giving cash to banks. When things settle, governments will offload all these investments at a profit. The tax payer is not likely to lose a penny. No free money is being given to evil bankers for them to pocket as bonuses. Governments should not have allowed the media to get away with terming this as a bailout . Economics is never an easy subject and governments failed in explaining to the people what exactly they are doing.

Having lost the PR debate, it is but natural that everybody is claiming a bailout. After all it is easy to make the case that any sector is more deserving than the fat cats at banks. The auto industry in the US claimed it on the grounds that they employ many more people. The charities in the UK are demanding it on the grounds that they perform a more noble task.

There are nearly 170,000 charities registered with the Charity Commission in the UK. Most of them do great work in helping those they have taken up as their cause. They deserve every support. Those who can, should continue to support them as much as possible. But there should be no bailout.

And governments should tell every other sector that wants to knock on its doors. No bailouts. Loans yes, support yes, bailouts NO.


Ravi Rajagopalan said...

I am afraid that the battle to save America from disaster may be lost before it has begun. The Geithner plan is timid, and it seeks to win a PR battle (no nationalisation) instead of finding a radical solution to a centennial problem. Is it naive to be disappointed in a polician?

Ramesh said...

Ravi - Nationalisation is not saleable in the US I think. Obama will be branded a liberal and then for the rest of the 4 years he can do nothing. Waffling may not be a bad idea to sell remedies in drips.

Ravi Rajagopalan said...

Perhaps we should email off line - but I profoundly disagree. We can "softly softly catchee monkee" but we cannot let the bugger get away. Remember Resolution Trust Corp?

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