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Though this analysis is undoubtedly necessitated by the present bailout action, yet it is imperative that we realize it is not the first time that such bailouts have been undertaken. In the US alone, earlier bailout examples include the following: Franklin National Bank (1974); Continental Illinois (1984); and the Savings and Loan (S&L) Corporations (1989). Eventually, those bailouts ended up costing the taxpayers $0.18 bn-$180 bn. And on an average each of these crises took approximately seven years to resolve. The present crisis is however much bigger in size and affects the entire world.
It is not just the US which has resorted to bailing out banks. Europe, as a whole, had decided to inject its banks with over $2 tn by the middle of October 2008. On the other hand, China announced in November 2008 a $586-bn fiscal stimulus package, though not a bank bailout. The two are interrelated, and in this economic crisis, different forms of response meant to achieve the same objective. The causa proxima for the current economic crisis is the banking industry. But why should the taxpayer bear the cost of the greed of a few? Doesn't the financial theory of Sharpe and Lintner tell us that only the systematic risk should be borne by everyone, while the idiosyncratic component, like risks specific to one industry, can be diversified away? Don't governments stand back and let other industries pull themselves out from the holes they dig themselves into? But in the theory lies the answer as to why bank bailouts may become necessary. |
