The economists' alternative to bailouts, Garett Jones | EconLog | Library of Economics and Liberty
I'm still shocked at the speed with which bipartisan elites
coalesced around TARP.
A key reason: The proffered alternatives were incredibly painful. No bailouts
would have meant bankruptcies much bigger and more complicated than Lehman--and
that bankruptcy ostensibly threatened
short run cash flows around the world.
Voters don't want pain. Yes, some voters want to see virtue rewarded and
wickedness punished--they may even claim that the pain is good for you--but the
rest of us want our medicine to taste good.
This stark choice between 100% bailouts and a cluster of possibly 1907-panic-inducing
megabankruptcies was totally unnecessary.
Did the big banks need equity injections? Well, there were plenty of potential
shareholders available for Citi, BofA, and all of the other TARP recipients. And they had a name: "bondholders."
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