Russ Roberts host of EconTalk, discusses his paper, "Gambling with Other People's Money: How Perverted Incentives Created the Financial Crisis." Roberts reflects on the past eighteen months of podcasts on the crisis, and then turns to his own take, a narrative that emphasizes the role of government rescues of creditors and the incentives this created for imprudent lending. He also discusses U.S. housing policy, particularly the Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac and how the government's implicit guarantee of lenders to the GSE's interacted with housing policy to increase housing prices. This in turn, Roberts argues, helped create the subprime market, created mainly by private investors. The episode closes with some of Roberts's doubts about his narrative.
You can find the podcast here.
It's important to remember that Russ Roberts, as a professor at George Mason, is wholly sold out into the Austrian economic ideal. And the word "ideal" suites that field best.
ReplyDeleteThe Austrian philosophy is predicated around a simple paradox: individuals in the business world are perfect decision makers, yet individuals in government are perfectly BAD decision makers. Essentially, Austrian economic thought likes to construct a world of two types of diametrically opposite people.
Therefore, the 2008 financial crisis could NOT have been caused by the 1980s deregulation of financial markets (which led to the development of adjustable rate mortgages, ARMs, the most dangerous of the predatory loans). Nor could the beautiful, wonderful investors in the financial markets be blamed -- they were tricked by their foolish government!
This perspective is very popular at George Mason, U of Chicago, and think tanks like the CATO Institute. Oh, yeah, it's very profitable too. Big companies love to have economists say: "Give the corporations more freedom to be wonderful and beautiful!" And so they pay them -- lots -- to say such things.
The truth, I think, is some where in the middle. Government sponsored housing incentives really did help to create the bubble. At the same time, though, investors were all too eager to make high-profit moves that were clearly just too short-sighted. Ignoring one or the other cause only lays ground to repeat the mistake.