Monday, August 31, 2009

Bailout Payback

Some of the banks that received bail-out money last year are paying funds back and the U.S. government is receiving a profit. (An article on this from the NYT is here.) At the time of the bailout, it was said the government could end up getting much of the money back. This is a good sign that the claim may be true. As the article notes, though, not all banks and other institutions may be able to repay the funds and the government could experience a loss overall.

So, does this indicate the bailout was successful? Unfortunately, we can never know what would have happened absent the government's actions. The return to the government is good, but less than private investors would have made because the government paid above market price for some of the assets. Of course, the purpose of the bail out was to help the balance sheets of banks look better. If the system would have gone under without the bailout, then any profit has to be a plus; if the system would not have gone under, then it should have been left to private investors. Again, a problem with economic as a science is that the controlled experiments rarely happen. We can bail out the banks and see what happens or we can not bail out the banks and see what happens, but we cannot do both.

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