Better regulatory infrastructure and clear federal budgeting rules are necessary when dealing with bailouts, says federal budget and tax law expert

“Emergency government bailouts of private industry are nothing new, but what makes the recent spate of so-called bailouts so extraordinary is simply the numbers involved and the extent of government involvement in ownership and management,” says Cheryl Block, leading federal budget expert and professor of law at Washington University in St. Louis.

In past publications, Block has expressed concern about enacting major legislation in response to financial emergencies or natural disasters without time for adequate deliberation. She says that one option is to identify, in advance, the circumstances under which the government will intervene and to specify the precise types of government intervention that will be considered. As many have noted, though, this approach would create “moral hazard” concerns, encouraging investors to take financial risks that they would not take in the absence of such a safety net.

Cheryl Block

“We absolutely do need a better regulatory infrastructure though, to monitor and provide better early-warning signals, and to provide procedural mechanisms for responding to emergencies,” Block says.

“My concern also is the lack of transparency and accountability of the current approach. This is not to say that the Treasury Department and Federal Reserve are doing a bad job under the circumstances. It is troubling, however, that weighty decisions are being made on an ad hoc basis behind closed doors. These decisions potentially involve not only substantial amounts of taxpayer money, but they also involve employment decisions regarding management of major business enterprises.”

Block says that another major concern is the lack of clear rules regarding how government bailouts of various kinds should be reflected in the federal budget.

“Estimating the cost of such bailouts is extremely complex,” she says. “In fact, some bailouts could conceivably make money for the government. My view is that at least some procedures and rules should be in place to make sure that bailout costs do not get hidden off the budget. In addition, accounting standards and methodologies used to estimate bailout costs should be clearly identified in advance.”

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