On the Political Economy and Limits of Crisis Insurance: The Case of the 2008–11 Bailouts

Abstract

The bailouts of 2008–10 are the most recent in a long series of in-surance-like policies designed to limit the losses of those harmed by a crisis of some kind — but enacted after a crisis is under way.

This paper analyzes the economics and politics of “crisis insurance” programs. The analysis helps explain why ex-post insurance is popular, why it tends to be undersupplied by private markets, and why governments may be better able to provide it. The analysis also points out that there are limits to what losses can be covered. The routine adoption of new programs to limit losses from crises tends to require greater expenditures through time because of moral hazard problems and the nature of crises. Eventually, this trend may produce “uninsurable” crises.

The analysis of this paper suggests that such problems can be moderated, al-though not eliminated, through appropriate standing polices for ex post funding of crisis insurance.

Keywords: Financial Crisis, Social Insurance, Political Economy, Crisis Management, Crisis Insurance, Bailouts

JEL Classification: D72, D73, D8, K2