Future bailouts of America

If the government won’t reduce the size of the safety net, and it has shown no appetite for doing so, it should at least tell us the price tag.

Marvin Phaup, a research scholar at George Washington University who examines federal budgeting, is one who is urging such an assessment. An expert on government guarantees, his wholly sensible view is that it is dangerous for possible bailout costs to remain unmeasured and, of course, unrecognized in the budget. “If we are extending the safety net, extending the implied guarantee to the debts of a lot of other financial institutions, and we know those guarantees are valuable and costly, then we ought to start budgeting for it,” Mr. Phaup said in an interview. “We can’t reduce the costs of these subsidies if we can’t recognize them.”…

Edward J. Kane, a professor of finance at Boston College, agrees that the costs associated with providing a safety net for complex and politically connected companies should be quantified. “People talk about systemic risk, but they have no metric of measuring it,” he said. “If we recognize that obligations are being put on the taxpayer down the line, then they can be controlled and managed.”

Mr. Kane suggested that lawmakers create an independent entity to collect data from all the protected firms so a realistic price tag could be placed on possible bailout costs. “We would force the institutions to give preliminary estimates and then challenge them,” he said. The combined figure for all the institutions would represent the total responsibility being shifted onto the backs and wallets of taxpayers.