Tuesday, October 27, 2009
Ending Government Bailouts As We Know Them
Fears of potential damage from the failure of a large financial institution has created a bailout mentality in which the U.S. government has committed many billions of dollars, intervened in the operations of scores of private firms, and caused excessive risk-taking. A new policy is needed. Two proposals were considered in testimony at the House Judiciary Committee a few days ago. Michael Barr of the U.S. Treasury and David Moss of Harvard supported a proposal to create an FDIC-like resolution regime for any financial firm viewed as too big or complex to fail. Testimony by David Skeel of Penn and me criticized that approach as institutionalizing the bailout process seen during the crisis and supported alternatives in which the failing financial firm would go through a bankruptcy process designed to deal with financial firms. Look forward to more analysis of this important topic in the coming weeks.