Monday, April 26, 2010

The Bailout Bill

The American has a good article by Phillip Swagel on how bailouts are about to become the law with the administration's financial regulation bill (HT Mankiw):

Markets participants will understand that the Senate financial regulation bill allows for bailouts, and this will give rise to riskier behavior that in turn makes future bailouts more likely. ...

A particularly misleading claim from the administration is that the bill is not a bailout because any losses would be recouped through taxes on banks after the fact. The intervention itself is the essence of the bailout, not whether there are losses to the government. Imagine if the Troubled Asset Relief Program was to end up with a profit—not just recouping the money put into firms over the past two years but actually making a return for taxpayers. No one would suggest that the TARP is then somehow not a bailout. Recouping funds after the fact might be a good way to protect taxpayers, but it is preposterous to claim that this makes the Dodd bill anything other than a bailout. The ability of the government to put money into a failing firm and make payments to counterparties at its discretion is what makes the Dodd proposal a permanent bailout authority, not the issue of who pays after the fact.

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