Hal S. Scott
- Published in print:
- 2016
- Published Online:
- January 2017
- ISBN:
- 9780262034371
- eISBN:
- 9780262332156
- Item type:
- chapter
- Publisher:
- The MIT Press
- DOI:
- 10.7551/mitpress/9780262034371.003.0023
- Subject:
- Economics and Finance, Economic History
This chapter discusses five general criticisms of government bailout efforts. First, taxpayers can suffer losses. While bailouts may, in the end, not be costly for taxpayers, one does not know this ...
More
This chapter discusses five general criticisms of government bailout efforts. First, taxpayers can suffer losses. While bailouts may, in the end, not be costly for taxpayers, one does not know this in advance of the expenditure. Second, bailouts may not work or may be prolonged. Bailouts may be the beginning and not the end of financial recovery. Third, bailouts create moral hazard. Both individual firms and the market may have perverse incentives if they know the government will come to the rescue. The consequence of this moral hazard is that firms will take on more risk than would otherwise be optimal because risk taking becomes a one-sided bet. Fourth, government decisions over bailout may be political and ad hoc. Some have claimed that the use of Troubled Asset Relief Program (TARP) funds was determined based on political rather than actual systemic risk grounds. Public confidence in the bailout effort can be seriously damaged if it is perceived by the public that the government did not follow any clearly articulated goals and principles in making important decisions. Fifth, bailouts may fail to boost lending activities.Less
This chapter discusses five general criticisms of government bailout efforts. First, taxpayers can suffer losses. While bailouts may, in the end, not be costly for taxpayers, one does not know this in advance of the expenditure. Second, bailouts may not work or may be prolonged. Bailouts may be the beginning and not the end of financial recovery. Third, bailouts create moral hazard. Both individual firms and the market may have perverse incentives if they know the government will come to the rescue. The consequence of this moral hazard is that firms will take on more risk than would otherwise be optimal because risk taking becomes a one-sided bet. Fourth, government decisions over bailout may be political and ad hoc. Some have claimed that the use of Troubled Asset Relief Program (TARP) funds was determined based on political rather than actual systemic risk grounds. Public confidence in the bailout effort can be seriously damaged if it is perceived by the public that the government did not follow any clearly articulated goals and principles in making important decisions. Fifth, bailouts may fail to boost lending activities.
Kathleen C. Engel and Patricia A. McCoy
- Published in print:
- 2011
- Published Online:
- April 2015
- ISBN:
- 9780195388824
- eISBN:
- 9780190258535
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:osobl/9780195388824.003.0013
- Subject:
- Business and Management, Political Economy
This chapter first explains how federal government bailouts during the subprime crisis increased the risk for more severe financial crises in the future. The government sent businesses the wrong ...
More
This chapter first explains how federal government bailouts during the subprime crisis increased the risk for more severe financial crises in the future. The government sent businesses the wrong message that they can pursue senseless strategies in search of higher yields because Uncle Sam will absorb any losses if firms are too big to fail. In other words, the result of the bailouts was moral hazard. The chapter then discusses three ways to rein in too-big-to-fail firms and evaluates the capacity of the Dodd-Frank Act to perform these tasks. First, the law should require federal regulators to put failing financial giants into receivership before stabilizing them with federal aid. Second, the nation needs a systemic risk regulator to track and address looming systemic risks. Finally, swaps need to be moved onto exchanges as much as possible, while swaps that bet on the performance of assets owned by others should be banned.Less
This chapter first explains how federal government bailouts during the subprime crisis increased the risk for more severe financial crises in the future. The government sent businesses the wrong message that they can pursue senseless strategies in search of higher yields because Uncle Sam will absorb any losses if firms are too big to fail. In other words, the result of the bailouts was moral hazard. The chapter then discusses three ways to rein in too-big-to-fail firms and evaluates the capacity of the Dodd-Frank Act to perform these tasks. First, the law should require federal regulators to put failing financial giants into receivership before stabilizing them with federal aid. Second, the nation needs a systemic risk regulator to track and address looming systemic risks. Finally, swaps need to be moved onto exchanges as much as possible, while swaps that bet on the performance of assets owned by others should be banned.
