Crisis Economics: A Crash Course in the Future of Finance

Nouriel Roubini and Stephen Mihm’s book on the great subprime crisis gets off to a good start by dismissing as a red herring the “tired” argument attributing the boom to “greed” and focusing instead on “changes in the structure of incentives . . . that channeled greed in new and dangerous directions.” These included programs [...]

Of Football Helmets and Bailouts

Attempts to reduce risk can themselves create it; correctly pricing risk is crucial to keeping an economy healthy.

Mr. Obama and the Bankers: “Doin’ What Comes Natur’lly”

Speaking to a very receptive Elyria, Ohio, crowd a few months ago, President Obama took off the gloves and promised that he was ready to fight to provide more jobs, improved education, and security from the threat of bankruptcy for homeowners. Turning his attention to the Wall Street bankers, who had just announced another round [...]

Do We Need Deposit Insurance?

f banks can suspend convertibility, depositors know that runs merely precipitate suspension. This greatly reduces depositor incentive to panic and run. Allowing banks the right to suspend would probably not eliminate all runs, but it would plausibly limit them to banks that are insolvent rather than merely illiquid.

The question, then, is whether a banking system with less regulation—no prohibition on suspension and no deposit insurance—might work better than current regulation—prohibitions on suspension, combined with deposit insurance and balance-sheet regulation.

The evidence from the pre-1914 era suggests that the regime with less regulation has promise. Banks were not legally allowed to suspend convertibility during this era, but many did so anyway, sometimes with explicit approval of, or even encouragement from, regulators. This did not eliminate runs and panics, but the record suggests that suspension reduced contagion and failure in these episodes.

Was Money Really Easy Under Greenspan?

Former Federal Reserve chairman Alan Greenspan has become everyone’s favorite scapegoat. His policies allegedly caused, or at least contributed to, the current financial crisis. He is attacked from the left for lax financial regulation, from the right for loose monetary policy, and from the middle for both. Yet two years ago, on leaving office, Greenspan [...]

What Happened to Market Discipline?

During the late presidential campaign Barack Obama said, “[Today’s economic problems are] a stark reminder of the failures of . . . an economic philosophy that sees any regulation at all as unwise and unnecessary.” What? Does that mean that until last fall the Bush administration embraced the free market? Nonsense. Governments at all levels [...]

The Subprime Crisis Shows that Government Intervenes Too Little in Financial Markets?

Start with two assumptions. No. 1: banking and financial markets are inherently unstable. No. 2: government intervention into banking and financial markets can only stabilize (never destabilize). You’ll find it easy to conclude that any period of market instability we experience, like the recent subprime-lending problem, is the market’s fault and that it could have [...]

The State Is Morally Hazardous To Your Health

It’s never been more important for advocates of individual liberty to emphasize that what is failing today is not the free market but the state. To claim otherwise is to ignore generations of pervasive and deep-seated privilege through government interference with the marketplace. Intentions are irrelevant. The laws of economics proceed whether those who interfere [...]

Subprime Monetary Policy

In recent years monetary policy has been conducted so as to create an expectation that the Federal Reserve will bail out investors when asset bubbles deflate. Investors have come to bank on the Fed’s backing of risky ventures. The recent crisis in the subprime mortgage market is at least partly the outcome of this new [...]