I talk about the crisis

by Russ Roberts on May 17, 2010

in Gambling with Other's $, Podcast

Having done 13 or so podcasts on the financial crisis, I give my take in the latest episode of EconTalk, drawing on my recent paper, Gambling with Other People’s Money.

In addition to the central argument of the paper–that the rescue of creditors made it easier to use excessive amounts of debt, inflating rates of return and making financial institutions more fragile, I also discuss the role of bias in evaluating narratives like mine. At the end, I talk my doubts about my narrative–alternative interpretations and causal stories.

One counter-argument I left out and I will try to come back to either in writing or in another podcast is whether you need any “cause” at all. Isn’t it possible that every once in a while, markets go crazy, people get overly exuberant, and you get a crash. Isn’t that the history of financial markets? So why do we need to blame creditor rescue.

This alternative view may be the right one, though some argue (Calomiris, for example) that past meltdowns can be attributed to various forms of government insurance that leads to imprudence. What I am pretty sure of is that the rescue of creditors over the past 30 years sure made things worse. Whether they were “the” cause is unknowable. Whether things would have gone haywire without those rescues is always possible. But it seems a lot less likely.

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{ 1 comment }

Tired May 17, 2010 at 10:21 am

If the income tax were more progressive, the hedge fund people wouldn’t have had such a windfall. Let them make a billion in a year, then tax 99% of it. This is the simplest solution to a tilted-to-the-rich, messed up financial system drain off. Of course libertarians oppose this, so this is the nth + 1 reason against libertarians.

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