Edited by John Raymond LaBrosse, Rodrigo Olivares-Caminal and Dalvinder Singh
Chapter 14: Transforming bailouts into investments: A proposal for the creation of the Federal Government Investment Corporation
The European debt crisis has reignited the spectre of fear consuming markets and the return of bailouts for the financial world. The problem is that the US is ill-prepared for extending another round of lifelines to the financial sector. American politicians missed an opportunity to institutionalise a framework for handling future bailouts as they assumed financial reforms would render bailouts unnecessary. In spite of politicians’ optimism (or hubris), future bailouts are a matter of inevitability as the question is when, rather than whether, government intervention may address future crises. The institutional design challenge is how to create a lasting framework to ensure that bailouts both mitigate systemic risks and safeguard taxpayers’ interests. The danger of not having a plan in place is that political capture or panic will lead to ad hoc bailouts that serve primarily as wealth transfers from the public to private sector. The US government succumbed to this fate in its response to the depths of the crisis in 2008–09. The government pursued a ‘break even’ approach for its overall investments and failed to impose meaningful reforms on beneficiaries or to reap returns commensurate with the risk to taxpayers.
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