It Turns Out the Bailouts Worked

I've ragged a lot on George W. Bush over the years, but it's important to note when government does something well. After having crashed the economy, perhaps Bush's finest policy decision was the bailout of the banks. I know, it creates moral hazard, blah blah blah, and I'm sure some other liberal will yell at me for giving him credit, blah blah blah, but it was the right call. To be fair, most of the heavy lifting was done by President Obama, in terms of implementation. Still, history says the two Presidents were both right on this:

The bank bailouts of 2008 are back in the news. The Financial Stability Board, an international group of regulators chaired by the Bank of England’s Mark Carney, just released a new set of policy proposals aimed at shifting the burden of bailouts from taxpayers to bank investors. From a policy perspective, the idea is to reduce the moral hazard of banks that are too big to fail and know that governments have to bail them out. But the political drive behind the proposal also flows from the anger of voters, especially in the United States, with bailouts, which they perceive as easy on the banks and hard on the taxpayers.

This political perception is factually incorrect, as Raphael Reinke and I show in an article recently published in Politics & Society. Bank bailouts surely create moral hazard, and the bailouts of 2008 were no exception. But if governments are going to bail out big banks, there are better and worse ways to design the policy, in terms of allowing taxpayers to share in the subsidy that the government gives to banks. The United States actually got the big details of the bailout right – and for this reason, American taxpayers made money on the deal: about $8-10 billion, excluding the non-bank parts of the bailout.

The United Kingdom and Germany, by way of contrast, both enacted bailouts that were less effective in helping taxpayers share in the potential upside of the bailout. As a result, U.K. and German taxpayers were stuck with large book losses on their bailouts: $14 billion for the United Kingdom, and $55 billion for Germany, which is a lot of money, even for German Chancellor Angela Merkel.

You might hate the bailouts. You might think it was wrong, either because of "moral hazard" or because they were banks. The policy worked, and we're better off as a country for it.