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Connectedness and ContagionProtecting the Financial System from Panics$
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Hal S. Scott

Print publication date: 2016

Print ISBN-13: 9780262034371

Published to MIT Press Scholarship Online: January 2017

DOI: 10.7551/mitpress/9780262034371.001.0001

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Criticisms of Bailouts Generally

Criticisms of Bailouts Generally

(p.265) 23 Criticisms of Bailouts Generally
Connectedness and Contagion

Hal S. Scott

The MIT Press

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.

Keywords:   government bailout, financial crisis, taxpayers, moral hazard, lending, Troubled Asset Relief Program, TARP

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