Bank Century Bailout: a Necessity or Not?

PUT THE MONEY IN. Feared by the likelihood of a systemic failure caused by Bank Century's bankruptcy, the government sparked controversy by injecting a massive amount of US$ 670 million bailout money into the bank to thwart it from collapsing.

When US Congress passed Hank Paulson‘s US$ 800 billion bailout bill in October 2008 to prevent the economy from slumping any further, several US citizens’ initial response was very much the treasury chief had expected, “Are you nuts? We’re the taxpayers and that’s the money we’ve been paying to you for years. Now you just hand over that massive amount to those Wall Street financial institutions?”

But as US treasury chief, surely Mr. Paulson was smarter than the average US taxpayers and knew that the money was put in good use. Shaded with the trauma of the Great Depression of 1929, where many banks in United States went bust that lead to the severest economic downturn the world has ever witnessed, he did numerous efforts to prevent the history from repeating itself –and as an economist, he definitely knows that the bailout plan was one of the most compulsory endeavors.

Yet he was not mistaken and now look at how his bailout plan swerved United States from encountering what they have had in 1929. It may be too soon to conclude that the bailout plan has succeed, but without doubt the US treasury under Paulson performed really well in handling the 2008 financial crisis and deserved a better score than their compatriots in 1929.

And thanks to the bailout now the dust has settled –while the US economy in the Great Depression took about 10 years to fully recover, the US economy (now headed by the new treasury secretary Tim Geithner) starts to show several encouraging signs of recovery at the moment and many economists believe it won’t take that long for the whole nation to finally convalesce.

Funny, here in Indonesia we are dealing with a similar situation. Many people are in disagreement regarding the $670 million Bank Century bailout and argue that it would be better if such amount of money is allocated in other sectors.

For many Keynesians economists, who are educated in throwing money during bad times through aggressive spending to prevent the economy from dreadful downward spiral, an insolvent bank’s bailout is among the list of where the money should be thrown.

There is no doubt that if we do not want to be bumped into another financial fiasco, we should be all Keynesians by now. And basically in Keynesian economics throwing bailout money in this kind of circumstance proved to be necessary –in other words, if government really wants to prevent a systemic failure, giving bailout for an insolvent bank whose collapse can severely damage the economy is never a question.

And this left people in Indonesia treasury in a tight spot; if they don’t lend Bank Century that huge amount of money and let the bank fold, the domino effect from the collapse will be immense and will bring other 23 banks into bankruptcy as well and trigger the crisis of confidence among the market–and eventually the impact for Indonesia’s economy will definitely be much bigger than only $670 million money which the treasury proposed to bail the bank out.

As our economy is performing really well at the moment and various economic indicators signify a brighter future for this country, we cannot allow the havoc to happen and surely we don’t want to return again to the gloom that we experienced during the 1998 financial crisis.

Here in economics we face trade-off; when things don’t work according to the original plan, sometimes you have to sacrifice something in order to achieve a more desired ending.

It is hard being government officials like Sri Mulyani and Hank Paulson these days; things don’t really work according to their plans as a catastrophe named global financial crisis has hit many countries really hard and put many treasury chiefs, including them, in the eye of the storm.

It never rains but it pours for our treasury chief; in her attempt to fix the situation, political dispute regarding the bailout proposal is rising. People question whether there is a political background behind the plan or not and do not believe that such massive amount of bailout is really necessary.

But instead of wrangling over the political dispute of the bailout ahead of the necessity of the bailout to the economy itself, we should realize that Sri Mulyani is the one who raised Indonesia as the unlikely winner in this global financial crisis as she helped Indonesia to record a positive 4% economic growth amid the current turmoil.

She has proven to us that she has the capacity to usher us through the storm, so by putting the $670 million Bank Century bailout proposal forward, certainly she is not that dumb to throw her entire hard work to waste and put Indonesia’s economy at stake by prioritizing few politicians’ self interest above the country’s.

Or if you were her, would you do that with the risk of losing all of your flawless credibility and previous achievements as treasury secretary?

If your answer is negative, then it should clean your mind regarding whether there is a political motive or not behind the bailout plan as well as unfolding the importance of the money for her to rescue the economy and keep it firmly on the right track.

Appointed as a treasury secretary, in economics undeniably Sri Mulyani is smarter than the average of us and comprehends the problem better than we do –and she will not bet that huge amount of money if she thinks it is not really necessary.

Hence let’s halt this hassle and simply put our faith in her like what the Americans did to Hank Paulson. Still have doubts about the money’s huge amount? Think in the long-run and consider it as a trade-off for saving more in the future.

This article was published in The Jakarta Post on Wednesday, September 9 2009