INSEAD professor of finance Theo Vermaelen makes a case for his own version of convertible capital as the panacea to government bailouts when banks fail….(read more)

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The issue of bank bailouts has been a highly contested matter in recent times. The question of who should bear the cost of these bailouts has been a subject of debate among experts and policymakers. Bank bailouts are massive financial interventions made by governments to help save failing banks that are too important to the economy to fail. The cost of bank bailouts is enormous, and it is essential to determine who should shoulder this cost.

The argument for government intervention in bailouts is that the failure of a large financial institution can have significant ramifications for the economy. The bankruptcies of Lehman Brothers and Bear Stearns during the 2008 financial crisis serve as a reminder of the potential negative consequences of a bank failure. These failures led to a global financial meltdown that resulted in tens of millions of job losses worldwide. The government’s responsibility, in this case, is to act quickly to prevent further deterioration of the economy.

However, the question remains: who should pay for these bailouts? The answer to this question is not simple and depends on different factors. One argument is that those institutions that caused the financial crisis should bear the brunt of the cost of bailouts. The reasoning behind this idea is that these institutions engaged in risky practices that led to their collapse, and it would be unfair for taxpayers to bail them out. It would also be a moral hazard for banks as they would not change their behavior or take responsibility for their actions.

On the other hand, some experts argue that banks should not bear the cost of bailouts entirely. This view suggests that the government should share some of the costs since they allowed banks to engage in risky behavior in the first place. Governments across the world have deregulated financial markets over the past few decades, which allowed banks to engage in riskier activities.

There is also the argument that taxpayers should contribute to bank bailouts since governments are expected to act in the best interest of their citizens. The argument is that taxpayers will ultimately benefit from a stable economy, and they should help bear the cost of bailouts.

In conclusion, while the question of who should shoulder the cost of bank bailouts is a complex one, it is imperative that it is addressed. Governments must work to ensure that they do not promote policies that lead to financial instability. At the same time, institutions that engage in risky behaviors should take responsibility for their actions and bear a significant portion of the cost of bailouts. Finally, taxpayers should also be willing to contribute to the cost of bailouts since they will ultimately benefit from a stable economy.