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Competition Policy, Bailouts, and the Economic Crisis

By  |  February 9, 2010

Bruce Lyons, Nov 01, 2009

The aims of this paper are twofold. First, I explain the economics of bank bailouts as distinct from bailouts for other sectors of the economy. Why do all the rules of good competition policy appear to fly out of the window when the banks get into trouble? Does this mean that we should abandon the rules equally for car manufacturers and other industries in trouble? I argue that a unique combination of two characteristics made it essential to bailout or nationalize the banks in the current crisis. No other sector of the economy can claim the same justification. Second, I review the threat of a retreat to politically- determined industrial policy and the need for vigilant implementation of economic effects-based competition policy.

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