More Capital, Safer Banks

Unless you’re on the receiving end, it’s hard to approve of corporate welfare like government decreed loan guarantees. That principle underlies recent debates my colleague, Veronique de Rugy, has taken part in over the Export-Import Bank’s future. Similarly, unless you think your deposits lie in a troubled bank, it’s hard to approve of bank bailouts, such as those we saw after the 1982 Latin American debt crisis, the savings and loans crisis and now the most recent crisis. That principle underlies the “Wall Street vs. Main Street” debate.

My colleague Matt Mitchell points out there are many forms of corporate welfare, including direct cash subsidies, government decreed loan guarantees, bailouts and expected bailouts. The 1971 bailout of Lockheed Martin appears to be the first for the U.S. government. Then, in 1984, we saw the U.S. government bailout Continental Illinois during the savings and loans crisis. Since then, it seems investors think politicians will bail out large banks, and politicians — knowing that voters don’t like this — look for ways to make it seem as if banks pay for those bailouts.

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