Was the bank bailout necessary?

Was the bank bailout necessary?  – | Dean Baker

Saving zombie banks supposedly prevented financial collapse. But would letting them fail really have been so bad?

US Treasury secretary Timothy Geithner says that we don’t need to bail out the banks anymore based on the results of his stress tests. We should follow up quickly on his assessment and start shutting the special Fed lending facilities enjoyed by the banks, the FDIC loan guarantee programme and the AIG slush fund.

However, given the hundreds of billions that have already gone out the door, it is still worth asking whether this bailout was necessary. The argument made by many economists was that it would cost taxpayers more money to do an FDIC-type takeover of banking behemoths like Citigroup and Bank of America than the tens of billions handed over to keep them afloat. In their story, the taxpayer bailout of bank stockholders, bondholders and top management was an unfortunate side effect.

While the next step in this argument is a calculation of the cost of a bite-the-bullet now approach versus a handout-and-wait strategy. With the right assumptions, the handout-and-wait strategy can be shown to come out on top, so we really were just helping ourselves when we gave hundreds of billions of dollars to the bankers that wrecked the economy.

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