Too Big to Fail? An Analysis of Government Bailout Policies
Project: Too Big to Fail? An Analysis of Government Bailout Policies
Investigator: A. Joseph Warburton
Colleges: College of Law and Whitman School of Management
Sponsor: John Templeton Foundation
Amount Awarded: $105,194 (2011-12)
Background: The public assistance provided to banks and automakers during the recent financial crisis raises important questions about the effects of government bailouts on financial markets. Professor A. Joseph Warburton is trying to answer those questions. Warburton and economist Deniz Anginer of the World Bank are measuring how the government bailouts of Chrysler, General Motors, and financial institutions ranging from Citigroup to Comerica have impacted the financial markets.
If large industrial and financial firms are deemed too big to fail, they become more attractive to debt investors, enabling the institutions to borrow more cheaply and take on greater risk, known as “moral hazard.” Their project attempts to quantify this moral hazard, a concept that is intuitive yet hard to measure. By doing so, they will contribute hard evidence that is missing in the current academic and policy debates.
Impact: The project has the potential to influence the implementation of the Dodd-Frank financial reform legislation that was adopted by Congress last year. Many details of that legislation were delegated to regulators, who will need to look for guidance. In addition, the legislation itself calls for a host of new studies and analyses to be conducted. Hence, the project has a ready audience.
The project can have even wider impact. The issues they explore are fundamental ones, concerning the role of government in economic life. Preliminary results have been presented at the Federal Reserve, Yale, Columbia, and Stanford.