Robert K. Rasmussen
David A. Skeel, Jr.
University of Southern California
University of Pennsylvania
Governmental Intervention in an Economic Crisis
This paper articulates a framework both for assessing the various government bailouts that took place at the onset of Great Recession and for guiding future rescue efforts when they become necessary. The goals for those engineering a bailout should be to be as transparent as possible, to articulate clearly the reason for the intervention, to respect existing priorities among investors, to exercise control only at the top level where such efforts can be seen by the public, and to exit as soon as possible. By these metrics, some of the recent bailouts should be applauded, while others fell short. We also explore the related question of what level of judicial scrutiny is appropriate for government actions taken during a bailout. We eschew the extremes of no judicial review on the one hand and full recourse to the courts on the other. Courts need to avoid interfering in a time of crisis, yet, when normalcy has returned, they should measure the actions taken against applicable legislative and constitutional requirements.
Optimists about the efficacy of the 2010 financial reforms, known as the Dodd-Frank Act, sometimes claim that the reforms have permanently ended bailouts.1 Pessimists retort that the Dodd-Frank Act did not end bailouts at all—some insisting it actually enshrines them in law—and that bailouts could truly be ended if lawmakers rolled back the legislation and enacted a different set of reforms.2 The two camps find common ground in the belief that, with the right set of government policies, bailouts will be a thing of the past.
We reject such aspirations as both fanciful and destructive. We count ourselves among the bailout realists who believe that bailouts could never be eliminated unless lawmakers banned debt finance and required banks and other firms to finance themselves entirely with equity.3 In this country, at least, debt will always be with us and so too will the prospect of bailouts.
It may be possible to make bailouts less likely, but we cannot make them disappear altogether.