12.5 Bailouts #Notebook

 12.5 Bailouts #Notebook

Bailouts restore the losses suffered by economic agents, usually with taxpayer money, outright grants, or purchase their equities, subsidized or government-guaranteed loans. 

However, it's politically controversial because it's usually unfair and increases moral hazard.

But, bailouts can be an effective way of mitigating further declines, if the massive deleveraging cannot stop.

During the Great Depression, the federal government used $500 million to capitalize on the Reconstruction Finance Corporation (RFC). 

In its initial phase, the RFC made some $2 billion in low-interest loans to troubled banks, railroads businesses, helped the economy to recover by keeping important companies afloat. 

Reference

Wright, R.E. & Quadrini, V. (2009). Money and Banking. Saylor Foundation.  Licensed under Creative Commons Attribution-NonCommercial-ShareAlike CC BY-NC-SA 3.0 license.