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A year ago this week, when the world seemed to be falling apart, the US government took the bold and unusual step of pumping hundreds of billions of dollars into some of the country’s biggest banks in an effort to save them - and the global economy.
Now a year later, we're still trying to figure out if it was the right decision, how will we pay for it and how should we handle such a crisis in the future.
Robert Pozen is the author of Too Big to Save? How to Fix the U.S. Financial System and is my Guest Author with this post.
Guest Author Blog: Why Have We Bailed Out So Many Financial Institutions? by Robert Pozen.
Over the last year, the federal government has injected over $200 billion into approximately 600 financial institutions, and guaranteed over $300 billion of their troubled assets. Given the rapidly rising US budget deficit, what was the justification for such large bailouts, and what should be the rationale for bailouts in future financial crises?
In bailing out banks, federal officials have often invoked the rubric of “too big to fail.” But it seems impossible that 600 banks met this test. In my view, there are two valid definitions of “too big to fail:”
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