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Bank Century bailout: Was it really necessary?
When US Congress passed Hank Paulson‘s US$800 billion bailout bill in October 2008, to prevent the US economy from slumping further, several US citizens’ initial response was very much as the treasury chief would have expected: “Are you nuts? We’re the taxpayers and that’s the money we’ve been paying to you for years
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hen US Congress passed Hank Paulson‘s US$800 billion bailout bill in October 2008, to prevent the US economy from slumping further, several US citizens’ initial response was very much as the treasury chief would have expected: “Are you nuts? We’re the taxpayers and that’s the money we’ve been paying to you for years. And now you’re just going to hand it over to those Wall Street financial institutions?”
But as the US treasury chief, surely Paulson was smarter than the average US taxpayer and knew that the money was being put to good use. Shaded with the trauma of the Great Depression of 1929 — when many banks in the United States went bust, and which lead to the severest economic downturn the world has ever witnessed — Paulson made numerous efforts to prevent history from repeating itself. And as an economist he definitely knew the bailout plan was an absolute necessity.
And Paulson was not mistaken. Just look at how his bailout plan has swerved the US economy around from an experience similar to the meltdown of 1929. It may be too soon to conclude that the bailout plan has succeeded, but without doubt the US treasury under Paulson performed really well in handling the 2008 financial crisis and deserved a better score than his compatriots of 1929.
And thanks to the bailout now the dust has settled – while the US economy in the Great Depression took about 10 years to fully recover, the US economy (now headed by the new treasury secretary, Tim Geithner) has started to show several encouraging signs of recovery and many economists believe it won’t take that long for the whole nation to finally convalesce.
It is funny that here in Indonesia we have been dealing with a similar situation. Many people are at odds over the $670-million Bank Century bailout, with one side suggesting it would have been better if the money had been allocated to other sectors.
For many Keynesian economists who are taught to throw money around during bad times through aggressive spending, to prevent the economy from entering a dreadful downward spiral, bailing out an insolvent bank is on the list of where money should be spent.
There is no doubt that if we do not want to be bumped into another financial fiasco, we should all be Keynesians by now. And basically in Keynesian economics throwing bailout money in this kind of circumstance proved necessary – in other words, if a government really wants to prevent a systemic failure, bailing out an insolvent bank whose collapse could severely damage the economy is never a question.
And this left people in the Indonesian treasury in a tight spot. If they didn’t lend Bank Century that huge amount of money and let it fold, the domino effect from the collapse would have been immense and threatened to lead to another 23 financial institutions into bankruptcy as well as triggering a crisis of confidence in the market – eventually having a much bigger impact on Indonesia’s economy than the $670 million the treasury proposed to bail the bank out.
With our economy performing really well at the moment and various economic indicators signifying a brighter future for this country, we cannot allow havoc to take over and surely we don’t want to return again to the gloom we experienced during the 1998 financial crisis.
Here in economics we face a trade-off: when things don’t work according to an original plan, sometimes we have to sacrifice something to achieve a more desired ending.
It is hard being government officials like Minister of Finance Sri Mulyani Indrawati and Hank Paulson these days. Things don’t really work according to their plans, as a catastrophe named the global financial crisis has hit many countries really hard and put many treasury chiefs, including them, in the eye of the storm.
It never rains but it pours for our treasury chief — in her attempts to fix the situation, political disputes regarding the bailout proposal have heated up lately. People have questioned whether there was political motivation behind the plan, and do not believe that the size of the bailout was necessary.
But instead of wrangling over the political aspects of the bailout instead recognizing its necessity for the Indonesian economy, we should realize Sri Mulyani is the one who made Indonesia an unlikely winner in this global financial crisis, helping us record a positive 4 percent growth amid the current turmoil.
She has proven she has the capacity to usher us through the storm, so by putting the $670 million Bank Century bailout proposal forward, she certainly was not that stupid to put all her hard work at risk and put Indonesia’s economy at stake by prioritizing a few politicians’ self interests above the country’s.
To put it another way, if you were her would you risk of tarnishing your flawless credibility and previous achievements as treasury secretary?
If your answer is negative, then put the political question aside and consider this: appointed as a treasury secretary, in economics she is undeniably smarter than the most of us and comprehends the problem better than we do.
With all her impressive accomplishments she has already proven to us her abilities, so why don’t we just end this hassle and simply place our faith in her, just as Americans did with Hank Paulson?
The writer is a student in University of Indonesia’s school of economics.
