When US Congress passed Henry 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 taxpayers 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 - which led 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.
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 for other sectors.
Your comments:
If you compare it to US experience, then why did they let Lehman Brothers go? For sure it had more assets and potential than Bank Century of Indonesia.
Maria Pakpahan
Edinburgh
Nice comparison, mate! But, saying that Sri Mulyani is smart is not enough to legitimize her peculiar decision. Smart does not mean honest, objective and righteous.
Also, if she is smarter than most of us, that doesn't mean that she can do anything without coordinating with her boss.
She could be a "wild, wild minister" indeed. Anyway, let history shows its complicated ways.
Doski
Jakarta
That's when Paulson made his mistake. If there's any blunder that Paulson made during his tenure, then letting Lehman Brothers fail is his single yet crucial mistake.
With the argument of preventing moral hazard and excessive risk-taking possibly taken by bankers if they continued to give bailouts to troubled banks, the US treasury decided not to bail out Lehman Brothers to show bankers alike, "Hey if your bank goes bust; you cannot just rely to us to bail you out."
Paulson may argue that bailing out Lehman, whose assets summarized at $600 billion, would have cost a lot of taxpayer money. And with the odds of that moral hazard and excessive risk-taking threat if he had given the money, perhaps at that time he thought that he had made the right decision.
Not really. His decision triggered an even more dire crisis in the US economy; credit markets froze, market confidence weakened, investors headed to the sidelines as they came across a volatile environment to invest their money in.
The US economy's estimated loss because of the failure of Lehman Brothers: $1 trillion. Bank Century is not as big as Lehman Brothers, true.
But still the collapse of the bank will possibly undermine the economic framework as another 23 banks are strongly correlated with the bank and waiting to be the next toll if the Indonesian treasury lets the bank fold.
For Indonesia's economy, the bailout plan is crucial, and from the US and Lehman experience, we can learn that it would cost more if this bailout policy had not been implemented.
Putera Satria
Jakarta
