It’s Been 10 Years Since The Last Financial Crisis. Are We Ready For The Next Storm?

Do we truly know what it cost the U.S. government—and, by extension, taxpayers—to bail out Fannie Mae and Freddie Mac, major banks and automakers, and the insurer AIG? Are we effectively measuring that cost and will we be able to make informed choices should the government need to intervene in a future crisis? Was it worth it?These are just some of the questions Deborah Lucas, MIT Sloan professor of finance and director of the MIT Golub Center for Finance and Policy, has been exploring in her research since the 2008 crash. Her work suggests that a fair value accounting approach, rather than a simple cash flow analysis or a discounting approach, provides a more accurate and distinctly different view of the cost of the bailouts. Her resulting estimate is substantially higher than commonly cited numbers, and directly contradicts the notion that the bailouts were completely repaid and therefore free.

“If costs are invisible, they’re ignored,” Lucas says. “And that creates serious distortions in how society allocates resources.” By conducting a consistent and economically meaningful analysis of the bailouts’ true costs, Lucas is laying the foundation for sound policy decisions should the government again decide to come to the rescue.

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