Now we know how much the financial crisis cost – Deborah Lucas

MIT Sloan Prof. Deborah Lucas

From Barron’s

It has been 10 years since the federal government took emergency actions in response to the financial crisis of 2008. Were those expensive interventions good investments? Or were they just bailouts for wealthy bankers?

Many economists believe that the policies—including the Troubled Asset Relief Program (TARP), the Housing and Economic Recovery Act of 2008, and others—were necessary to avert even greater economic harm. But consensus remains elusive. Some argue that even more aggressive rescue policies were called for. Others claim that more institutions should have been allowed to fail.

Popular perceptions are also mixed. A common narrative is that ordinary taxpayers were forced to pay trillions of dollars to rescue rich bankers. Others cite tallies showing net costs to taxpayers that were modest or even negative, because the money was paid back. Certainly, political distaste for the bailouts influenced key provisions of the Dodd-Frank Act of 2011, which made sweeping changes to the regulatory landscape with the stated intent of forever ending bailouts.

Perhaps the most fundamental question about bailouts is whether and when their benefits justify their costs. This is not an easy question to answer, but accurate cost assessment is also essential to address other questions: Did the likely benefits of the policy justify the expense? Could the benefits have been achieved at a lower cost?

Drawing on existing cost estimates and augmenting those with new calculations, I conclude that the total direct cost on a fair-value basis of crisis-related bailouts in the U.S. was about $498 billion. My analysis imposes the discipline of a fair-value approach, which incorporates the uncertainty about the size of eventual losses at the time assistance was extended and the cost of that risk. By contrast, popular accounts simply add up realized cash flows or tally total risk exposures.

That cost is big enough to raise serious questions about whether taxpayers could have been better protected. At the same time, it is small enough to ask whether Dodd-Frank’s goal of eliminating bailouts entirely justifies the costs it has imposed on financial institutions, and suggests revisiting some of the regulations that were hastily put into place after the crisis.

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Join #MITSloanExperts for “The Role of Housing and Mortgage Markets in the Financial Crisis” Twitter chat on April 10

Finance Beyond Crisis, MIT Sloan Idea Exchange, April 10, 2019

MIT Sloan’s Antoinette Schoar and Shashank Shekhar, founder of Arcus Lendingwill discuss the topics that will be covered in Schoar’s upcoming panel discussion at MIT Sloan Idea Exchange’s Finance Beyond Crisis Conference on April 25. The chat will take a look back at the 2008 financial crisis, a decade later, explore how the crisis was a catalyst for change in the field of finance, and discuss its misconceptions and global impacts.

Antoinette Schoar is the Michael M. Koerner Professor of Entrepreneurship and Professor of Finance at MIT Sloan School of Management where she uses her expertise in finance, entrepreneurship, and organizational economics to conduct research in venture capital, entrepreneurial finance, corporate diversification, governance, and capital budgeting in firms.

Twitter chat host Shashank Shekhar is widely regarded as “America’s Premier Mortgage Expert,” and has built his company, Arcus Lending, from the ground up. Beginning with its start in the worst year for financial markets in 2008, Arcus Lending has now grown to become one of top 500 fastest growing private companies in America named by Inc Magazine. Shashank is also the author of First Time Home Buying 101, Real Estate Unleashed, and his latest #1 best-seller My First Home.

Join us on Twitter on April 10 at 12 p.m. ET and follow along using #MITSloanExperts to learn more about this topic and get your questions answered.