This is the Cato Daily Podcast for Friday, May 30th, 2008.

I'm Caleb Brown.

Anna Schwartz, along with Milton Friedman, literally wrote the book on American monetary

history. Now Dr. Schwartz is calling the Bernanke

Fed thus far a failure. Anna Schwartz is a research associate at the National Bureau of Economic

Research. This is the second part of my conversation with Dr. Schwartz

recorded Wednesday.

Given the difficulty of pricing these assets and the sort of exotic way that credit was extended in the

90s and the early 2000s.

How much of this subprime crisis is a failure of government and how much of it is a failure of markets?

The subprime crisis was created by financial engineers who changed the model on which mortgage loans had been extended for decades.

The firm that made the loan, kept the loan on its balance sheet and collected the payments from the mortgage borrowers and it was a very safe kind of investment.

But once the financial engineers

provided the model for securitization of mortgage loans backed by the collateral of the mortgages, some of which were certainly not priced correctly.

and it's the mispricing of the subprime mortgage loans that's at the basis of the difficulties in the mortgage

market. All right, right well then my next question is does the moral hazard rear its ugly head if the

the Fed in many ways helped bail out creditors of Bear Stearns.

You would think that creditors would be the types of people who would want to make sure

that the company they're investing in has a reasonable balance sheet.

Well, being accommodative, keeping interest rates low, providing lots of liquidity is a sure path to creating moral hazard

moral hazard.

No firm is penalized for stupid decisions.

...