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May 28, 2015 at 12:38 PM
If your debt payments grow to be significantly greater than your cash flow and credit capacity, you’re probably heading to bankruptcy, unless you’re lucky enough to have some rich uncle who can bail you out.
But if you’re a U.S. financial institution, no worries — you’ve got a rich uncle, Uncle Sam, whose commitment to bail you out has grown by the trillions over the past decade and a half.
An updated reckoning of the safety net the U.S. government provides the financial system, calculated by the Federal Reserve Bank of Richmond, shows that explicit and implicit government guarantees have grown to cover 60% of financial sector liabilities — up from about 45% in 1999.
What the Richmond Fed calls its “Bailout Barometer” has now reached $26 trillion.
Before the potential liability causes an aneurysm, consider the “good news” that taxpayers will never be on the hook for this for a number of reasons, starting with the fact that the U.S. lacks the financial means for a bailout of this size.
As the Richmond Fed points out, last year’s GDP totaled less than $17 trillion. Moreover, the government — one hopes — is unlikely to have to bail out the financial system in its entirety, and even those firms that come to trouble have some assets that can be deployed to offset some of their liabilities.
Rather, the concern animating the Richmond Fed’s bailout barometer project is that government guarantees, be they explicit or implicit, encourage risk-taking, which in turn increases the probability of a financial crisis and subsequent bailout.
“When creditors expect to be protected from losses, they will overfund risky activities, making financial crises and bailouts like those that occurred in 2007-08 more likely,” the report says.
For those reasons, the Richmond Fed advocates shrinking the financial safety net as a means “to restore market discipline and achieve financial stability.”
Some of the liabilities that the government guarantees may seem as American as apple pie. For example, the Federal Deposit Insurance Corp. insures bank deposits up to $250,000 — a commitment totaling $6 trillion in assets at commercial banks and savings institutions, and close to another trillion at credit unions.
But some of the liabilities are more surprising or controversial.
For example, uninsured domestic deposits are included in the tab because “most uninsured depositors were protected during the bank failures that occurred following the financial crisis that began in 2008.” The Richmond Fed’s estimate includes “implicit protection that people are likely to infer from past government actions and statements.”
