The Moral Hazard of Bailouts
Question: Would a triage solution, where healthy banks were left alone and unhealthy ones put through FDIC resolutions, have better managed the bailout? (Arnold Kling, EconLog)
John Allison: I definitely think it would’ve been feasible and I definitely think it’d have been better off in the long term. It’s difficult to argue about whether we’d have been better off in the short term, I think that’s a complicated question. But in the long term, it’d be much better off. In my career, Citigroup has failed three times, been bailed out by the government three times, and every time, they’ve gotten bigger and worse. There is a tremendous moral hazard to the government constantly keeping poor run institutions in business and it prevents a natural market correction process. So we shouldn’t have been in the situation if we hadn’t had the Fed over spending the money supply and what happened with affordable housing through government policy, we wouldn’t have been in the shape we were in. But given the situation, a triage solution would have really been a better solution.
How can we prevent companies like Citigroup from being continually buoyed by government funds while growing worse with each bailout? John Allison explains the long-term benefits of the triage solution to industry failures.
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