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On balance, it's everyone's right to be stupid and burn their money to the ground. But realistically, in the interconnected world we live in, that will often in

by awad 8y ago

On balance, it's everyone's right to be stupid and burn their money to the ground. But realistically, in the interconnected world we live in, that will often involve burning other people as well and that's not something that should be OK. The housing crisis had greedy unchecked bankers, but it also had greedy unsophisticated (in a financial sense) individuals over-leveraging themselves and we all paid the price as taxpayers. Some people lost their homes and some people merely got a slap on the wrist, and however you feel about each, we ALL paid for it.

pitaj 8y ago
The "greedy unchecked banker" narrative is cute, but it completely absolves the distortive effects government policies had on the market before the crash. This included incentivizing subprime loans, Fanny Mae and Freddy Mac, and previously bailing out banks (a signal that your risk will be subsidized in the future). There is no rule that the State must step in during bad situations, in fact many would argue that the government stepping in makes things worse. We don't all have to pay the price. The market needs those corrections to learn. If the government steps in every time, it doesn't have a chance to.
- FabHK 8y ago
  No. The government needs to step in to prevent a total collapse. When the government refused to step in to rescue Lehman Brothers (precisely because of the moral hazard problem you allude to), all hell broke loose. Since the expectation (correctly) is that government will step in, we need regulation (before a crash) that limits risk taking, for example capital requirements (=equity) for banks. Your narrative has been, in my opinion, comprehensibly refuted by, for example, Anat Admati & Martin Hellwig in *The Bankers' New Clothes" [1], or Krugman already in 2008 [2]. An overview over the debate is given in [3], including this quote from Krugman: > “for any public figure to go with the Congress-did-it argument at this stage is for him to reveal both that he is grossly ignorant about the central policy issue of the day and that he gets his ‘analysis’ from right-wing flacks.” This is not to say that government policy has been perfect; but taking the government out of the equation is not going to fix anything. [1] http://bankersnewclothes.com http://bankersnewclothes.com [2] https://www.nytimes.com/2008/07/14/opinion/14krugman.html?_r=1 https://www.nytimes.com/2008/07/14/opinion/14krugman.html?_r... [3] https://www.outsidethebeltway.com/bloomberg-dont-blame-banks-for-mortgage-crisis/ https://www.outsidethebeltway.com/bloomberg-dont-blame-banks...

by awad 8y ago

pitaj 8y ago

The "greedy unchecked banker" narrative is cute, but it completely absolves the distortive effects government policies had on the market before the crash. This included incentivizing subprime loans, Fanny Mae and Freddy Mac, and previously bailing out banks (a signal that your risk will be subsidized in the future). There is no rule that the State must step in during bad situations, in fact many would argue that the government stepping in makes things worse. We don't all have to pay the price. The market needs those corrections to learn. If the government steps in every time, it doesn't have a chance to.

FabHK 8y ago
No. The government needs to step in to prevent a total collapse. When the government refused to step in to rescue Lehman Brothers (precisely because of the moral hazard problem you allude to), all hell broke loose. Since the expectation (correctly) is that government will step in, we need regulation (before a crash) that limits risk taking, for example capital requirements (=equity) for banks. Your narrative has been, in my opinion, comprehensibly refuted by, for example, Anat Admati & Martin Hellwig in *The Bankers' New Clothes" [1], or Krugman already in 2008 [2]. An overview over the debate is given in [3], including this quote from Krugman: > “for any public figure to go with the Congress-did-it argument at this stage is for him to reveal both that he is grossly ignorant about the central policy issue of the day and that he gets his ‘analysis’ from right-wing flacks.” This is not to say that government policy has been perfect; but taking the government out of the equation is not going to fix anything. [1] http://bankersnewclothes.com http://bankersnewclothes.com [2] https://www.nytimes.com/2008/07/14/opinion/14krugman.html?_r=1 https://www.nytimes.com/2008/07/14/opinion/14krugman.html?_r... [3] https://www.outsidethebeltway.com/bloomberg-dont-blame-banks-for-mortgage-crisis/ https://www.outsidethebeltway.com/bloomberg-dont-blame-banks...