Impact of the 'Great Bailout': Evidence from Car Sales

At VoxEU:

Impact of the ‘great bailout’: Evidence from car sales, by Efraim Benmelech, Ralf R Meisenzahl, Rodney Ramcharan: Nearly a decade since it took place, the US federal government’s rescue of the financial system in 2008-2009 remains highly controversial. At the time, the Troubled Asset Relief Program (TARP), which injected equity into commercial banks and provided for the bailout of the General Motors Acceptance Corporation (GMAC) — the lending arm of General Motors— and the US automobile sector, was initially rejected by Congress as a ‘bailout to bankers’. And even today, populists on both the right and the left echo a similar refrain, as economic growth remains tepid while asset prices boom. Moreover, nuance and careful research by highly respected economists observe that more aggressive intervention to relieve the household debt burden might have made for a stronger economic recovery (Mian and Sufi 2014). It remains an open question, then, whether the government’s rescue of the financial sector helped the US economy beyond Wall Street. Or was the government’s focus on the financial sector fundamentally misplaced?

We may never have definitive answers to these questions. But in new research, we suggest that without federal intervention to stabilize financial markets and recapitalize some non-bank lenders such as GMAC, the magnitude of the economic collapse in 2008-2009 might have been much worse (Benmelech et al. 2016). Before the financial crisis, a large network of non-bank financial institutions, such as mortgage brokers and consumer finance companies —the shadow banking system — became increasingly important sources of credit in the US. For example, finance companies like GMAC financed about half of new car sales in 2005. The form of shadow banking financing differed markedly from traditional banks. While the latter use government insured deposits to make loans, non-bank lenders make loans using short-term uninsured wholesale funding, mostly from entities such as money market funds (MMFs) and pension funds.¹ In 2008 and 2009, MMFs and pension funds became unwilling or unable to fund many of these non-bank lenders (Kacperczyk and Schnabl 2013). Car sales collapsed in the US, and GM and Chrysler entered bankruptcy…

Skipping ahead to the last paragraph:

It may difficult to definitively judge whether the federal resources and attention devoted to rescuing the financial system, relative to relieving household debt overhang, was appropriate. And the evidence in Mian and Sufi (2014) makes a compelling case that too little might have been done for households. But Wall Street and Main Street are intimately connected. And despite the enormous scale of the federal rescue of the US financial sector, our work and others show that the dislocations in financial markets resonated well beyond Wall Street. One can surmise then that without the rescue, the Great Recession of 2008-2009 might have been much more severe. …