News Release: Finance and Economics, Law, Politics

Sep. 29,  2008

Bailout Mess Echoes S&L Crisis of the 1990's

Taxpayers may be howling about the price tag of the $700 billion bailout plan that Congress is considering, but according to Emory University economist Hashem Dezhbakhsh, the current crisis is reminiscent of another huge financial disaster in the not-so-distant past: the savings and loan bailout of the early 1990s.

"Savings and loans took a lot of risks in 1980s, which left a lot of institutions insolvent. Government had to come to rescue." The overall cost to taxpayers then? "Half a trillion," says Dezhbakhsh. "It is, in fact, déjà vu."

The cause of the current bailout is the same now as then, he says. "If you have a financial system with incentives that are not set properly, then the system lends itself to excessive risk taking at the expense of someone else."

The most unfortunate aspect of the current bail out effort is that it is so close to the election, says Dezhbakhsh. "That's why it's really hard to have a real debate about the plan. Both Democrats and Republicans are afraid that if noting were done, there would be a disaster, and they'd be responsible for it--even if they don't believe in bailing out institutions making bad choices." 

One other unfortunate aspect is fear. "The public thinks this is subsidy for the rich and Wall Street," says Dezhbakhsh. "That's unfortunate because it shows total lack of trust in what politicians and Fed officials say. There is no doubt that special interests are at work here. One cannot deny that the treasury secretary (Henry M. Paulson Jr.) is a veteran of Wall Street.

"At the same time, no one can deny the psychological impact of a passive approach to the crisis that will be very dangerous," adds Dezhbakhsh. "If there is fear of banks collapsing, then there will be run on banks, you can have a severe credit crunch that spreads from the financial side to the rest of the economy. Then, no one can conduct business. That's the fear."

Dezhbakhsh, a professor of economics, is chair of Emory's Department of Economics. His areas of interest include applied econometrics, the oil market, financial markets and volatility, and economics of crime.

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