In the new Hoover Institution Press book, Gambling with Other People’s Money, Russ Roberts argues that rescuing rich people from the consequences of their decisions with money coming from average Americans is bad for democracy.
Roberts, the John and Jean De Nault Research Fellow at the Hoover Institution, explains that leverage—using “other people’s money”—was the central cause of the crash of 2008. In his book, subtitled How Perverse Incentives Caused the Financial Crisis, he shows that both government and Wall Street are to blame—government, for coddling the large banks, and those banks, for pushing for the policies that rescued them from their mistakes. He argues that a new policy approach is necessary if America is to avoid another major financial crisis.
He wrote, “The most culpable policy has been the systematic encouragement of imprudent borrowing and lending. That encouragement came not from capitalism or markets, but from crony capitalism, the mutual aid society where Washington takes care of Wall Street and Wall Street returns the favor.”
The host of the podcast, EconTalk, Robert's previous books include How Adam Smith Can Change Your Life. In his new book, using a mixture of metaphor and hard data, he describes:
- How changes in the rules of the game—some made for purely financial motives, some made for more altruistic reasons—created the crisis
- Why no regulatory reform is likely to succeed until we recognize the harmful incentives created by the persistent rescue of creditors
- How the interactions of housing policy, tax policy, and monetary policy contributed to the crisis
- How the history of government rescuing creditors and lenders encouraged the recklessness of lenders who financed the bad bets that led to the crisis
- How the expected returns to top bank executives from bad investments can be large even when the effects on the firm are harmful—the upside is unlimited, but the downside is curtailed
- How Fannie Mae and Freddie Mac’s increases in loan purchases helped inflate the housing bubble and set the stage for the collapse
- Why rescuing people from the consequences of their bad decisions is ultimately bad for capitalism and for our democracy
Roberts said, “It was the use of other people’s money—borrowed money—that turned a problem in one sector of the asset market—housing—into a broader problem that destroyed numerous financial institutions and derailed the economy.”
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Clifton B. Parker, Hoover Institution: 650-498-5204, cbparker [at] stanford.edu