Date Added: Jan 2010
This paper analyzes the effectiveness of different governmental policies to prevent the emergence of financial crises. In particular, the authors study the impact on welfare of using public resources to recapitalize banks, government injection of money into the banking system through credit lines, the creation of a buffer and taxes on financial transactions (the Tobin tax). They illustrate the trade-off between these policies and derive policy implications. The recent financial turmoil has restored the debate concerning the government's responsibility on crises management. It also shows that investors, governments and depositors share their ignorance about the real quality of banks' investments; this ignorance has been deepened and worsened by actions taken by the main risk rating agencies like Moody's, Standard and Poor's and Fitch Ratings.