The negative effects of the government bailout

Written by mason stockstill
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The negative effects of the government bailout
Belief that the bailout only helped the rich is one negative effect of the legislation. (Spencer Platt/Getty Images News/Getty Images)

Congress approved the Emergency Economic Stabilization Act in October 2008. This legislation established the Troubled Asset Relief Program, also called TARP or "the bailout," which authorised up to £455 billion in loans and other funding for troubled banks and institutions. While the bailout prevented the existing economic crisis from getting worse, it also had negative effects.

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Encouraging Risky Investments

Banks and other financial institutions may make riskier investments if their leaders believe the government will always bail them out during a crisis. The Congressional Oversight Panel, created to review and monitor TARP spending, predicted large banks will expect taxpayers to rescue them if risky investments fail. It is likely that the country will face future economic crises if large financial institutions are encouraged to make riskier investments.

Taxpayers on the Hook

The Congressional Budget Office estimates the bailout will cost taxpayers £16 billion after recipients repay their loans. That does not include more than £130 billion lost in the Fannie Mae-Freddie Mac bailout, which was not part of TARP. The federal government also guaranteed £2.9 trillion in debts held by large banks and other institutions as part of the bailout. This meant the U.S. government would have paid those outstanding debts if the banks failed. Those guarantees ended in 2009.


Many financial institutions tried to take advantage of the bailout by applying for funds or loans for which they were not entitled. The TARP inspector general investigated dozens of banks that may have committed fraud. Federal prosecutors had charged 45 people with fraud and recovered £98.7 million in assets as of January 2011. Another 142 investigations were ongoing at that time.

Loss of Public Trust

Many Americans continued to struggle financially after the bailout while banks and financial institutions recovered quickly. The program that helps troubled homeowners modify their mortgage agreements to avoid foreclosure has helped fewer people than intended, and moved slowly. These two circumstances led to a widespread perception that the federal government cared more about the financial recovery of banks and the wealthy people who run them than the challenges facing regular Americans. The TARP inspector general warned that this damage to public trust in government undermines the federal government's ability to respond to future economic crises.

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