Bailouts have a lousy track record around the world

Y'know, before we go plunging into an insanely expensive and potentially dangerous bailout scheme to relieve a few ailing financial companies of the burden of their bad choices, perhaps somebody could do a little research to see if anybody has attempted similar bailouts in the past, and whether they've worked out well. The research could be done by economists working for an institution with the sort of broad international scope that would give them access to experiences all over the world -- an institution like ... hmmm ... the International Monetary Fund. And it would be nice if that research was up-to-date and available right now, don't you think?

Oh, wait! How did that research paper get here?

Hat tip to Matt Welch at Reason for finding Systemic Banking Crises: A New Database (PDF) by Luc Laeven and Fabian Valencia, a just-released IMF working paper which examines "all systemically important banking crises for the period 1970 to 2007, and has detailed information on crisis management strategies for 42 systemic banking crises from 37 countries." The prognosis on bailouts? Not good.

Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.

Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions' liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.

The authors don't come to purely free-market conclusions -- they do talk about targeted government intervention and (government-controlled) sovereign wealth funds as having beneficial effects (although the benefits of sovereign wealth funds would seem to come from free-flowing globalized capital overall).

But they don't find any evidence to support massive bailout deals of the sort that seems poised to be vomited up by Congress.