Economics

Bailout 101

In President Obama’s speech about financial regulatory reform in New York City last week, he made this assertion:

But what’s not legitimate is to suggest that somehow the legislation being proposed is going to encourage future taxpayer bailouts, as some have claimed. That makes for a good sound bite, but it’s not factually accurate. It is not true. (Applause.) In fact, the system as it stands—the system as it stands is what led to a series of massive, costly taxpayer bailouts. And it’s only with reform that we can avoid a similar outcome in the future. In other words, a vote for reform is a vote to put a stop to taxpayer-funded bailouts. That’s the truth. End of story. And nobody should be fooled in this debate.

I have two observations on this. First, I find it unappealing for the president to say that a particular point of view is not legitimate. Second, I disagree with him on the substance. Plain and simple, Senator Chris Dodd’s bill allows bailouts. The Dodd bill allows the government to put money into a failing firm and pay off the firm’s creditors. The bill also allows the government to guarantee the debts of a failing firm. Both of these are bailouts. Shareholders will be wiped out—everyone agrees on that—but Dodd’s bill allows the government to make whole the creditors to a failing firm. That is a bailout, as I more fully explain in my article in THE AMERICAN.

The assertion that this is not a bailout because any losses suffered by the government will be recouped by a tax on banks is a non sequitur. The essence of a bailout is the government intervention and the ability to make creditors better off. Whether taxpayers suffer losses is important, but is not related to whether the action is a bailout.

Imagine, for example, that the Troubled Asset Relief Program (TARP) made a profit for taxpayers. Would anyone then say that the TARP was not a bailout? Of course not. In fact, the TARP bill requires any costs to the taxpayer to be made up eventually. So this is already in the TARP. Asserting that the Dodd bill does not allow bailouts is equally preposterous. So I disagree with the president and his advisors on the substance. But I find it especially troubling that he would claim that my substantive view is not legitimate.

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