Beyond the inconsistencies and implementation problems, financial-institution bailout policy has been unwieldy, inequitable, extremely costly, disruptive, and lacking in transparency and oversight. The policy response of bailouts and maintenance of the status quo has been precisely the wrong response, as it has led to retaining many of the mega-financial institutions that pose systemic risk, thus planting the seeds for future crises.
This present crisis has demonstrated that undertaking bailouts of troubled institutions, which involves structuring transactions that attempt to transform the institution into a viable one, while simultaneously projecting the reaction of investors and markets, is a process for which government is ill-suited. These bailout powers should be revoked. Financial angst still hangs over the system as the underlying imbalances that led to the crisis have not been reconciled. The ultimate answer is to place troubled institutions into receivership or the relevant form of bankruptcy—including many of the institutions that have already been bailed out.
The Cato Institute
April 20, 2009