Abstract
Myth: The government could not allow liquidity to dry up, credit markets to stop functioning and giant banks to fail. Government had to act. The bailouts were a justifiable response to market failure and systemic risk. They were successful because the economy did not collapse and the financial sector remained viable without the dreaded government takeover. Bailouts were necessary to save the free market economy.
Reality: One important objective of the bailouts was to rescue large speculating financial institutions, their managers and creditors. Most democracies would have chosen temporary government ownership and changed management. The latter plan would have saved the financial system without risking trillions of dollars in taxpayer money and without protecting and rewarding management for failure.
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- 1.
Nationalization – government takeover of a private business.
- 2.
Brewer and Jagtiani (2013) suggest that banks may have spent about $15 billion in added premiums in eight mergers to attain the threshold level for the designation of “too big to fail”.
- 3.
Johnson and Kwak (2010).
- 4.
Johnson and Kwak (2010).
- 5.
Johnson and Kwak (2010).
- 6.
Stiglitz (2010).
- 7.
Krugman (2014a) writes that the Dodd-Frank reform bill, which gives the Treasury Department resolution authority, will permit government to place too big to fail banks in receivership without bailing out the bankers in future crises.
- 8.
Troubled Asset Relief Program (TARP) – a government program to purchase “troubled assets” and equity from financial institutions during the Crash. Congress authorized the use of up to $700 billion.
- 9.
Johnson and Kwak (2010).
- 10.
Cassidy (2009).
- 11.
Madrick (2011).
- 12.
Johnson and Kwak (2010).
- 13.
Cassidy (2009).
- 14.
Johnson and Kwak (2010).
- 15.
Cassidy (2009).
- 16.
Y. Smith (2010).
- 17.
Adams and Brock (1986).
- 18.
Stiglitz (2010).
- 19.
Stiglitz (2010).
- 20.
Shaanan (2010).
- 21.
Taibbi (2011).
- 22.
Mirowski (2013).
- 23.
Write down-reducing the book value of an asset because of a market change.
- 24.
Mirowski (2013).
- 25.
Stiglitz (2010).
- 26.
Shaanan (2010).
- 27.
Sloan (2008).
- 28.
Macey (2008).
- 29.
Shaanan (2010).
- 30.
Stiglitz (2010).
- 31.
Mirowski (2013) makes a similar point.
- 32.
Blau et al. (2013) find that firms that had lobbied or had other types of political connections were more likely to receive TARP money and earlier than politically unconnected firms that did not engage in lobbying.
- 33.
Stiglitz (2010).
- 34.
Madrick (2011).
- 35.
Stiglitz (2010).
- 36.
Shaanan (2010).
- 37.
Shaanan (2010).
- 38.
Krugman (2015a).
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Shaanan, J. (2017). Myth 13: The Bailouts’ Purpose Was to Save the Free Market Economy. In: America's Free Market Myths. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-50636-4_14
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