Is US response to financial crisis strong enough?
Government action to save major financial firms has yet to show clear, positive results.
In the history of financial crises, one lesson stands out: It’s important to match the scale of the remedy to the scale of the problem – and to do so quickly.
That doesn’t mean every corporate bailout is a good idea. But what’s needed is a forceful approach, whether the costs fall on investors or taxpayers. Governments that try to cut corners or take a wait-and-see approach often end up making recessions deeper and taxpayer costs higher, say financial historians.
Some signs that efforts to date haven’t been adequate to the task:
• Insurance giant AIG, now largely government-owned and supported, is expected to report the largest quarterly loss in corporate history Monday – plus a newly restructured bailout that will amount to the third rescue of a company that has already tapped $150 billion in federal funding.
• The Treasury on Friday announced its third rescue in six months of the bank Citigroup, which has received $45 billion in capital infusions plus billions more to insure against losses.
• The overall economy has declined more sharply than economists expected, with gross domestic product shrinking at a 6.2 percent annual pace in the final quarter of 2008.
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