The fabulously named economists Luc Laevan and Fabian Valencia have a working paper on banking crises [pdf] out for the International Monetary Fund, covering 42 meltdowns in 37 countries since 1970. Their conclusion? Beware bailouts:
Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.
Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions' liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.
Link via tax-code-spelunking journalist David Cay Johnston, who in another post over at TPM Cafe urges some much-needed journalistic skepticism about the scope and urgency of the crisis, and therefore the need to bail anyone out:
The news is full of anecdotal evidence of companies and individuals having trouble getting credit. But there is no sign that this is other than cherry picking specifics because in the ordinary course of business lots of people get turned down or have their credit lines frozen.
If the markets are about to seize up how did one of the biggest players in the deeply troubled newspaper industry, McClatchy, get its $1.2 billion of credit lines renewed on Friday? And keep in mind that McClatchy gets the majority of its advertising revenue from two of the states with the biggest subprime mortgage/overvalued housing problems—California and Florida.
The TED spread, a technical market measure widely cited, is not even at record levels (or at least was not when I last looked Thursday night). If this is the worst financial crisis since the Great Depression then why is not setting new records—huge new records?
Brian Doherty interviewed Johnston back in December 2007.