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bailouts on econtalk
If you had reason to believe that someone would bail you out if your investments turned bad and you ended up over your head, would you be more or less prudent in the choice of those investments? These three episodes provide different perspectives to the story of 40 years of such implicit and explicit guarantees. ... on developments leading up to the mess, addressing Greenspan's hubris and moral hazard aspects surrounding publicly traded investment banks. ... on what contributes to financial instability - historical and current perspectives. ... on the last 25 years of banking bailouts, moral hazard, and unpriced risk
Bailouts, the Fed, and the Crisis (3/1/2010) - Barry Ritholtz, author of Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy, talks about the history of bailouts in recent times, beginning with Lockheed and Chrysler in the 1970s and continuing through the current financial crisis. In addition to the government role in aiding ailing companies, Ritholtz also looks at the role of the Fed in discouraging prudence through its efforts to keep asset prices and the stock market at high levels. The conversation closes with a discussion of what Ritholtz has learned from the crisis.
The Financial Crisis (10/26/2009) - Charles Calomiris of Columbia Business School talks about the financial crisis. Calomiris argues that it is important to put the crisis in historical perspective in the context of other bank crises. He argues that bank crises differ widely across time and place--some times and some places are placid, others are prone to regular crises. Calomiris argues that frequent episodes of failure are tied to government guarantees such as various forms of deposit insurance or similar incentives for risk-taking. Looking at the current crisis, Calomiris indicts "too big to fail," the government's reliance on ratings agencies as a measure of risk, and poor corporate governance as the key causes.
Too Big to Fail (10/5/2009) - Gary Stern, former President of the Minneapolis Federal Reserve Bank, talks about his 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.