Summarizing Russ Roberts' "Gambling with Other People's Money"

- political economy


The government bailed out debt-holders in a series of bank failures in the 70’s through the 90’s, signaling an implicit guarantee of creditors. This implicit guarantee combined with a politician-driven effort starting in the 90’s to orchestrate an increase in homeownership led to excessive use of leverage by Wall Street and aspiring homeowners to finance increasingly risky investments in housing in the 00’s. This in turn allowed Wall Street and politicians to privatize gains ($$, votes) and socialize eventual losses to taxpayers. The use of excessive leverage turns a failure into a meltdown. Rescues distort the natural feedback loop of capitalism. We are less capitalist than we would like to admit. We don’t need to more precisely engineer our financial system; we need to reintroduce “skin in the game.”

Q&A-style notes

What role did housing policy and politicians play?

What role did commercial and investment banks play?

But even if debt-holders expected to get bailed out, there are still equity-holders. Why didn’t they restrain the riskiness of the major players?

But executives of these lenders were also big equity holders, and their personal wealth was surely more concentrated in their companies? Why didn’t they constrain risk-taking?

Why did mortgage lenders get comfortable lending to people putting no money down?

What role did new financial regulation play?

But aren’t taxpayers also homeowners? If so, what exactly is the problem?

Other factors?

Shocking numbers:

**Tangent: What is a CDS? **