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were the bank bailouts a good idea


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Were the bailouts a good idea?

by Tyler Cowen


Following the renomination of Bernanke, it is worth revisiting this question. Here is a recent report:


With the FTSE World Banks index up 130 per cent since its lows of early March, the paper losses that governments in France, Belgium, Luxembourg and Germany are sitting on have also shrunk. Berlin's 25 per cent stake in Commerzbank's common equity is now worth only 2 per cent less than the €1.8bn ($2.6bn) the German government paid for it.


In spite of criticism of the bail-outs of lenders such as Citi, Bank of America and Wells Fargo, the Treasury has reaped gains from the coupons payable under the troubled asset relief programme bail-out funding, most of which has been repaid.


If another big negative shock comes the government's liability position still could turn out to be much worse. But if we stop and click pause and evaluate the policy today -- the answer to my question is "yes, the bailouts were a good idea."


Without the bailouts we would have had many more failed banks, very strong deflationary pressures, a stronger seize-up in credit markets than what we had, and a climate of sheer political and economic panic, leading to greater pressures for bad state interventions than what we now see. Milton Friedman understood all this quite well, which is why argued bailouts would have been a good idea in the 1929-1931 period.


(By the way, some libertarians like to pretend that Milton Friedman blames the Fed for "contracting" the money supply by one-third in that period but in reality Friedman blames the Fed for having let the money supply fall by one-third and not having run a bank bailout.)


If you are a libertarian, is not our current course more favorable for liberty than would have been a repeat of 1929-1931? If not, I would be curious to hear your counterfactual version of how matters would have proceeded, without the financial bailouts. Is it that you think the regional banks would have raised the financing to pick up the entire bag and keep the banking system afloat? Or is it that natural market forces would have somehow avoided a wrenching surprise deflation? Or do you think the authorities for some reason would have not nationalized the major banks? Please let us know.


Maybe you think that the bailouts will have disastrous long-run consequences. And maybe they will, I worry about this too. But if anyone should know that modern politics can only stand so much short-run panic, it is libertarians and fans of Bryan Caplan's book. If we had not done the bailouts we did, we would, within a few months' or weeks' time have received a much worse and costlier bailout run by Congress and Nancy Pelosi. How does that sound?


I can see that Peter Boettke, on his blog, periodically struggles with these questions. I speculate that Pete even toys with the idea that I am right and that Friedman, a founder of the Mont Pelerin Society, was right about 1929-1931. But I wonder if he can bring himself to utter those magic few words: "All things considered, the financial bailouts were a good idea. They would have been a good idea way back when and they were a good idea this time around."


Edit to add: I agree with the gist of this, although I think there could have been away to structure the bailouts so as to have the taxpayers benefit more as the banks recovered.

Edited by wiegie
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at least you are quoting from a good blog.


I think there is pretty close to a consensus across the political spectrum that the government ought to have done something to avert/minimize the financial crisis, but there is disagreement over the details and the follow up. the link at the end seems to sum it up pretty well:


Now that we have the benefit of hindsight, what should with think about the bailouts? A large number of conservatives and libertarians are against them. I think that a large number of liberals are too, though for different reasons. Both dislike giving state money to companies, but the right worries about the tax burden and the corrupting influence of government on the market as much as the corrupting influence of companies on the government. They are also, I think, more worried about moral hazard, while liberals worry more that the money spent on banks can't be spent on other government programs.


All these concerns are correct. The bailouts have probably substantially increased moral hazard, and perversely, arguably undermined the political will for regulation that might reign in that moral hazard. Top investment bankers really do seem to have a worrying amount of influence over Treasury and the Fed. The tax burden is large, and should worry you whether you wish that money had been spent on food stamps, or returned to taxpayers.


That said, they were probably the best thing we could have done.


There are things about the bailouts that could have been done better; I think both Democrats and Republicans demanded too little from the large banks in return for its support. But the basic strategy seems like the best option in a bad situation.

Edited by Azazello1313
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And now the banks are making profits again...mainly from the massive fee hikes they are charging their broke customers. Yeah, great idea. Tell me again why we needed 10 super banks instead of 5 and what lessons they've learned?


The main lesson in this is if you throw a trillion dollars at pretty much any business or endeavor for free, it tends to get a little better. Lot of Captain Obviouses out there.

Edited by TimC
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