Gary Stern on Too Big to Fail

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4.7 • 4.3K Ratings

🗓️ 5 October 2009

⏱️ 67 minutes

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Summary

Gary Stern, former President of the Minneapolis Federal Reserve Bank, talks with EconTalk host Russ Roberts about Stern's book, Too Big To Fail (co-authored with Ron Feldman), a prescient warning of the moral hazard created when government rescues creditors of financial institutions from the consequences of bankruptcy. Stern traces the origins of "too big to fail" to the rescue of Continental Illinois in 1984 and then follows more recent rescues including those of the current crisis. The conversation explores the incentive effects of such rescues on the decision-making by executives in large financial institutions. The discussion concludes with Stern's ideas for alternative ways to deal with large, troubled financial institutions.

Transcript

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0:00.0	Welcome to Econ Talk, part of the Library of Economics and Liberty. I'm your host Russ Roberts
0:13.9	of George Mason University and Stanford University's Hoover Institution. Our website is econtalk.org
0:21.2	where you can subscribe, find other episodes, comment on this podcast, and find links to
0:26.5	another information related to today's conversation. Our email address is mailadicontalk.org. We'd
0:33.6	love to hear from you.
0:37.0	Today is September 25, 2009, and my guest is Gary Stern, who just recently stepped down from
0:45.6	being president of the Minneapolis Federal Reserve Bank. He is the author with Ron Feldman
0:50.2	of the book Too Big to Fail, the hazards of bank bailouts. Gary, welcome to Econ Talk.
0:56.0	Thank you. Good to be with you.
0:57.6	Your book Too Big to Fail, which is the subject of our conversation, it changed my life. I don't
1:05.2	say that too often about books here in Econ Talk. Occasionally, I was in the Stanford bookstore
1:10.4	a few months ago, and somehow, even though they have a very large selection of economics books,
1:16.7	and they only had one copy of yours, and it was just the spine showing. It wasn't face out,
1:21.2	as they say in the business. But the title was Big Print, and it caught my eye, and I thought,
1:26.2	well, Too Big to Fail, I need to know more about that. I picked it up. I didn't know much about
1:31.1	the history of bank bailouts, and I saw that it was written, I think, in 2004, and figured, well,
1:37.6	that was a while back. It's probably not so relevant, but I leaf through it, and I thought,
1:41.7	I need to understand this, so I bought it. It really helped me understand what I consider the
1:48.0	fundamental question and questions of the financial crisis, and listeners have heard me ask about
1:56.2	this many times. Why would a firm, like Bear Stearns, or Lehman Brothers, or Fannie Mae, take so
2:03.0	much risk? Why would they be so leveraged? Why would they put themselves in a position where a bad
2:10.4	quarter would kill their firm? Why weren't there more natural forces of prudence to restrain them?
	...

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