Gambling with Other People's Money

Monday, February 11, 2019

What caused the Financial Crisis of 2008? Most explanations blame either government regulation or government deregulation. Either government forced private-sector banks and financial institutions to extend credit to risky borrowers, or the removal of government oversight allowed greed to run amok.

Russ Roberts argues that these explanations miss the underlying cause of the mess: the past bailouts of large financial institutions that allowed these institutions to gamble carelessly because they were effectively using other people’s money rather than their own. 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.

Using a mixture of metaphor and hard data, Roberts makes the case that the biggest players of the financial sector underestimated the risks they were taking because they had little need to assess those risks accurately—the costs of a mistake were likely to be small when the bailouts came. And the bailouts came, damaging both capitalism and democracy.

Roberts argues that a new approach to financial crisis management is necessary to avoid further damage when the next financial crisis occurs.