March 14, 2012

The Real Cost of the 2008 Bailouts

Hester Peirce

Former Senior Research Fellow
Summary

Regulators, faced with another crisis in the future, will look to this precedent of preferential treatment for some and not others set by Secretary Geithner and his colleagues in 2008. When businesses come asking for money, government officials will find it hard to say no.

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This excerpt was originally published in US News. Read the full text here.

"Today marks the four-year anniversary of the Bear Stearns collapse that opened the door to a series of taxpayer bailouts of AIG, Fannie, Freddie, many banks, and the auto companies. Thesebailouts imposed tremendous direct and indirect costs on our society and set a poor precedent on how to deal with future crises.

Even Treasury Secretary Tim Geithner acknowledged in the Wall Street Journal earlier this month that the Dodd-Frank Act "will not prevent all future financial crises." Despite the harm caused by bailouts, during the next crisis, we can expect more of the same. Faced with the aggressive intervention of regulators in 2008, when the next crisis occurs, future regulators will feel pressure to repeat the Geithner era bailouts, rather than make the tough choices."