Federal housing agencies and enterprises represent 3/4 of bailouts costs in 2009

Measuring the Cost of Bailouts. Deborah Lucas. Rev. Financ. Econ. 2019. 11:85–108, Nov 2019. https://doi.org/10.1146/annurev-financial-110217-022532

Abstract: This review develops a theoretical framework that highlights the principles governing economically meaningful estimates of the cost of bailouts. Drawing selectively on existing cost estimates and augmenting them with new calculations consistent with this framework, I conclude that the total direct cost of the 2008 crisis-related bailouts in the United States was on the order of $500 billion, or 3.5% of GDP in 2009. The largest direct beneficiaries of the bailouts were the unsecured creditors of financial institutions. The estimated cost stands in sharp contrast to popular accounts that claim there was no cost because the money was repaid, and with claims of costs in the trillions of dollars. The cost is large enough to suggest the importance of revisiting whether there might have been less expensive ways to intervene tos tabilize markets. At the same time, it is small enough to call into question whether the benefits of ending bailouts permanently exceed the regulatory burden of policies aimed at achieving that goal.

Keywords: bailouts, financial crisis, government guarantees, contingent claims


5. CONCLUSIONS

Properly measured, the direct costs of bailouts arising from the 2008 US financial crisis totaled
approximately $500 billion. That conclusion rests on many uncertain assumptions, and the estimates
presented here, individually and collectively, should be viewed as having wide error bands.
Nevertheless, the total is large enough to conclude that the bailouts were not a free lunch for
policy makers, as some have claimed. At 3.5% of 2009 GDP, the cost is big enough to raise serious
questions about whether taxpayers could have been better protected.Another point of comparison
consists of the concerns that were raised at the time about the affordability of the $392 billion cost
of the American Recovery and Reinvestment Act, the major stimulus package enacted in 2009 to
combat the recession.
At the same time, the analysis here establishes that assertions of costs to taxpayers in the multiple
trillions of dollars are not true. The estimated cost of $500 billion is small enough to raise
questions about the wisdom of trying to end bailouts without seriously weighing the costs of doing
so. The magnitude suggests the possibility that the costs of financial suppression and regulatory
compliance could exceed those of allowing a small probability of future bailouts. It also suggests
that it would be worthwhile to seriously try to assess the costs and benefits of the regulations put
into place after the crisis, including their more difficult to measure indirect effects.
A novel finding in this analysis is the large size of borrower bailouts involving federal credit
programs, most notably those offered by the FHA, the GSEs after they were taken into conservatorship,
and the federal student loan programs. Also notable are the modest costs found to be
associated with the major actions taken by the Federal Reserve and the FDIC, both of which assumed
large risk exposures, but with protections in place that shielded ordinary taxpayers from
directly bearing most losses.
The unsecured creditors of large financial institutions—most significantly, of Fannie and
Freddie, Citigroup, and AIG—were the largest direct beneficiaries at the time of the bailouts.
The equity holders of those institutions benefited less than the popular perception, as many were
effectively wiped out. However, prior to the bailouts equity prices may have been boosted by
the perceived value to shareholders of being a too-big-to-fail institution. For the bailouts arising
from federal credit programs, the direct beneficiaries were the borrowers who otherwise would
have been unable to obtain funds or would have paid more.
A similar approach to the one here could be used to estimate bailout costs and to identify the
direct beneficiaries for other countries and other historical episodes. For example, it would be useful
to study the European bailouts that occurred around the same time but under quite different
regulatory and political frameworks than those in the United States. The approach could also be
applied to the earlier bailouts in Japan and the wave of bailouts in emerging markets in the 1990s.
A challenging but valuable contribution would be the development and calibration of models that
could begin to quantify the competitive and broader economic effects of bailouts, and that could be
used to evaluate the counterfactual effects of alternative policy actions. Developing credible frameworks
for quantifying benefits is a challenging but important direction for future research as well.