Russ Roberts on the Crisis

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4.7 • 4.3K Ratings

🗓️ 17 May 2010

⏱️ 90 minutes

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Summary

Russ Roberts, host of EconTalk, discusses his paper, "Gambling with Other People's Money: How Perverted Incentives Created the Financial Crisis." Roberts reflects on the past eighteen months of podcasts on the crisis, and then turns to his own take, a narrative that emphasizes the role of government rescues of creditors and the incentives this created for imprudent lending. He also discusses U.S. housing policy, particularly the Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac and how the government's implicit guarantee of lenders to the GSE's interacted with housing policy to increase housing prices. This in turn, Roberts argues, helped create the subprime market, created mainly by private investors. The episode closes with some of Roberts's doubts about his narrative.

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	other information related to today's conversation. Our email address is mailadicontalk.org. We'd
0:33.6	love to hear from you. In March of 2008, Bear Stearns found itself in a great deal of financial
0:45.4	difficulty. They were unable to borrow money to cover the promises they had made and to prevent
0:52.4	any consequences from that occurring. The Fed, Federal Reserve, and the US Treasury broke
1:01.2	her to deal with JP Morgan Chase, where I guaranteeing about $30 billion worth of Bear Stearns
1:12.0	assets that JP Morgan Chase did not feel comfortable acquiring or finding out quickly
1:18.2	whether they were worth acquiring those assets. The government got JP Morgan Chase to honor
1:27.6	Bear Stearns, to acquire Bear Stearns and honor their promises to their creditors, lenders,
1:32.4	and others. That was in March of 2008. It was really an unprecedented set of activities
1:42.3	by the Fed. It was deemed crucial, necessary, and unavoidable. Not a lot of evidence, but
1:50.1	there was a great deal of uncertainty and fear about what would happen in Bear Stearns
1:54.5	were allowed to go bankrupt, and their creditors would then not be getting the money that they
1:58.7	expected to get and so on. The Fed and the Treasury justified that intervention on grounds
2:04.1	of stability. Stability that lasted until September of 2008, when things really went haywire,
2:11.2	Fannie and Freddie collapsed, Lehman Brothers collapsed, AIG collapsed. The government
2:17.4	stepped in in Citibank as well as into crisis. The government stepped in in the case of
2:25.9	all those institutions other than Lehman Brothers. Lehman Brothers was allowed to go bankrupt,
2:31.9	and that set in motion a great deal of anxiety and uncertainty in markets. We found ourselves
2:40.3	in the middle of what is now called the financial crisis of 2008. Watching that, and you've
	...

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