Bail out cost

TARP deployed upto $700bn to save the financial system. The final cost however turns out to be much lower. In August 2009 the bill was estimated to be $341bn, revised down to $117bn this month. The final number, according to the administration, is expected to be $90bn.. and that is almost equal to carmakers bailout + AIG + subsidies to homeowners. America did not even experience a simultaneous currency crisis. This really means that the crisis barely costs 1% of the GDP! 

To put that in relative context, IMF issued a paper – Leaven & Valencia – that examines all the past banking crises between 1970 to 2007 concluding that the average cost of such events is around 16% of the GDP. This paper has a good database so check out the tables that start from pg.32. We notice that although countries have adopted different crisis management strategies, almost all of them used emergency liquidity support and blanket guarantees.

Too good to believe?
1. The cirsis is rooted in illiquidity, not insolvency.
2. It’s too early. The long term performance of the economy determines the ultimate amount of aid the ailing financial system requires. For example, in 1996 Japan’s bail out cost was penciled at 3% of GDP. Today it is 14%.
3. Numbers are too optimistic. Perhaps the government accounting takes a narrow view of the fiscal cost of the crisis leaving out impact of the recession on the broader economy.


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