A free market bailout alternative?

Philipp Bagus, Juan Julián () and Miguel Neira

European Journal of Law and Economics, 2014, vol. 37, issue 3, 405-419

Abstract: It has been more than 3 years since the collapse of the investment bank Lehman Brothers and the beginning of the Troubled Asset Relief Program. Most recently, the sovereign debt crisis in Europe has led to the bailout of the governments of Ireland, Portugal and Greece. A main reason behind these bailouts is to support European banks loaded with government bonds on their balance sheet. In this article we analyze the detrimental consequences of the public bailout in 2008 and argue that a free market alternative existed. The alternative of a private bailout outlined in this article, consisting of the conversion of liabilities into equity and a private capital increase, largely avoids the problems of a public bailout. Similarly, a public bailout of governments of the Eurozone to sustain banks may be detrimental. Copyright Springer Science+Business Media, LLC 2014

Keywords: Financial crises; Credit expansion; Bailout; Crowding-out; Moral hazard; E32; E52; E65; G01; G33; G38; H81; K 10; K 20 (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1007/s10657-012-9342-3

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