The 2008 bailouts inadvertently laid the groundwork for another financial crisis
We may already be seeing the warning signs.
This week, the Congressional Research Service, the in-house think tank of the U.S. Congress, did whatever the extreme policy nerd equivalent is to commemorating the tenth anniversary of the 2009 financial crisis by releasing a report titled, “Costs of Government Interventions in Response to the Financial Crisis: A Retrospective.” Their findings? Technically [pushes glasses up bridge of nose; blinks furiously], the government bailing out massive banks was a great idea, despite the fact that many Americans really hated the bailouts and that granting them eroded public trust in our institutions.
In the report, the economists Baird Webel and Marc Labonte argue that simply by offering bailouts in any form, the government managed to perpetuate the byzantine, late-capitalist behemoth that is the modern economy. (The assumption that such an economy is inherently worth perpetuating is left unchallenged, which should give you a good idea of where Webel and Labonte are coming from.) They write, “the form of government support [to the banks] was not particularly important as long as it was done quickly and forcefully because what the financial system lacked in October 2008 was confidence, and any of several options might have restored confidence.”
However, the authors — who, to repeat, are economists employed by the U.S. government — essentially contradict their argument at the end of their paper by noting that the government’s actions during the financial crisis could inadvertently foster “a greater expectation that the government will provide rescues in response to financial instability again.” They continue, “Perversely, economic theory predicts that this expectation — whether or not it is warranted — would result in increased private sector risk-taking that would lead to an increased risk that systemically disruptive financial difficulties at firms occur again.” In other words, by bailing out irresponsible and corrupt corporations, the government may have emboldened them to become even more corrupt and act even less responsibly.
Since July, the SEC has charged behemoth financial institutions such as Citigroup, Deutsche Bank, Morgan Stanley, Merrill Lynch, and Wells Fargo with defrauding or otherwise misleading small investors, so I’d say that the authors might be onto something.