Cato study: Bailouts are billion-dollar bandages, not viable treatment

Financial and legal expert Vern McKinley, in research for the Cato Institute, diagnoses the illness plaguing America’s financial sector and prescribes a treatment that will get the economy growing again — economic liberty and a return to the free markets that have been progressively abandoned over history.

He writes, in part:

Beyond the inconsistencies and implementation problems, financial-institution bailout policy has been unwieldy, inequitable, extremely costly, disruptive, and lacking in transparency and oversight. The policy response of bailouts and maintenance of the status quo has been precisely the wrong response, as it has led to retaining many of the mega-financial institutions that pose systemic risk, thus planting the seeds for future crises.

This present crisis has demonstrated that undertaking bailouts of troubled institutions, which involves structuring transactions that attempt to transform the institution into a viable one, while simultaneously projecting the reaction of investors and markets, is a process for which government is ill-suited. These bailout powers should be revoked. Financial angst still hangs over the system as the underlying imbalances that led to the crisis have not been reconciled. The ultimate answer is to place troubled institutions into receivership or the relevant form of bankruptcy—including many of the institutions that have already been bailed out.

That’s smart people talk for "The bailouts aren’t going to help the economy because they’re just keeping incompetent banks afloat and actually ridding us of the problem.  The government should have stayed out and allowed the banks to segregate their failing programs into a different company, then have that company declare bankruptcy so they can get their fiscal affairs back in order."

You can read the entire Cato study, "Bright Lines and Bailouts: To Bail or Not To Bail, That Is the Question" by clicking here.