European Journal of Law and Economics

, Volume 37, Issue 3, pp 405–419 | Cite as

A free market bailout alternative?

  • Philipp Bagus
  • Juan Ramón Rallo Julián
  • Miguel Ángel Alonso Neira


It has been more than 3 years since the collapse of the investment bank Lehman Brothers and the beginning of the Troubled Asset Relief Program. Most recently, the sovereign debt crisis in Europe has led to the bailout of the governments of Ireland, Portugal and Greece. A main reason behind these bailouts is to support European banks loaded with government bonds on their balance sheet. In this article we analyze the detrimental consequences of the public bailout in 2008 and argue that a free market alternative existed. The alternative of a private bailout outlined in this article, consisting of the conversion of liabilities into equity and a private capital increase, largely avoids the problems of a public bailout. Similarly, a public bailout of governments of the Eurozone to sustain banks may be detrimental.


Financial crises Credit expansion Bailout Crowding-out Moral hazard 

JEL Classification

E32 E52 E65 G01 G33 G38 H81 K 10 K 20 


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Copyright information

© Springer Science+Business Media, LLC 2012

Authors and Affiliations

  • Philipp Bagus
    • 1
  • Juan Ramón Rallo Julián
    • 1
  • Miguel Ángel Alonso Neira
    • 1
  1. 1.Department of Applied Economics IUniversidad Rey Juan CarlosMadridSpain

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