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11. What Lessons Can We Learn from the Boom and Turmoil?

Author:
Jeffrey M. Lacker
Publication Date:
01-2009
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
The current financial crisis undoubtedly will inspire a great deal of research in the years ahead, and it may take some time before anything like a professional consensus emerges on causes and consequences. After all, it took several decades to document the causes of the Great Depression, and recent research continues to provide new perspectives. Nonetheless, I believe the central questions that are likely to occupy researchers are plainly in view, and some tentative lessons have emerged already. And in any event, legislators are not likely to await the fruits of future scholarship.
Topic:
Democratization, Economics, International Trade and Finance, Markets, Privatization, and Financial Crisis
Political Geography:
United States

12. Financial Innovation, Regulation, and Reform

Author:
Charles W. Calomiris
Publication Date:
01-2009
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Financial innovations often respond to regulation by sidestepping regulatory restrictions that would otherwise limit activities in which people wish to engage. Securitization of loans (e.g., credit card receivables, or subprime residential mortgages) is often portrayed, correctly, as having arisen in part as a means of “arbitraging” regulatory capital requirements by booking assets off the balance sheets of regulated banks. Originators of the loans were able to maintain lower equity capital against those loans than they otherwise would have needed to maintain if the loans had been placed on their balance sheet.
Topic:
Democratization, Economics, International Trade and Finance, Markets, and Privatization
Political Geography:
United States

13. Bad Rules Produce Bad Outcomes: Underlying Public-Policy Causes of the U.S. Financial Crisis

Author:
Bert Ely
Publication Date:
01-2009
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
The current global financial crisis is the worst economic crisis since the Great Depression, with no end in sight. Already, much political finger pointing has occurred, with most of those fingers pointed at supposedly greedy bankers, investors, and hedge-fund managers as well as the financial deregulation of recent decades. Governments everywhere are rushing to enact new regulatory protections to pre- vent another crisis of this magnitude. Yet if history is any guide, these new regulations will set up the global economy for yet another financial crisis, perhaps worse than the present one, or create regulatory straitjackets that will greatly impede economic growth.
Topic:
Democratization, Economics, International Trade and Finance, Markets, and Privatization
Political Geography:
United States

14. Federal Reserve Policy and the Housing Bubble

Author:
Lawrence H. White
Publication Date:
01-2009
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
The U.S. housing bubble and the fallout from its bursting are not the results of a laissez-faire monetary and financial system. They happened in an unanchored government fiat monetary system with a restricted financial system.
Topic:
Democratization, Economics, International Trade and Finance, Markets, and Privatization
Political Geography:
United States

15. The Case for Policy Sustainability

Author:
Wolfgang Münchau
Publication Date:
01-2009
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Should we worry about moral hazard while the house is burning? The discussion about economic policy is full of biblical metaphors, the language of water and floods, and of fire extinction during crises. Metaphors, even when not mixed, are often obstacles to the clarity of thought. That is clearly the case with the metaphor of moral hazard in trying to understand the current financial crisis. Instead of focusing on moral hazard, I prefer to use the concept of policy sustainability to argue that sustainable monetary, fiscal, and regulatory policies are essential for lasting prosperity.
Topic:
Democratization, Economics, International Trade and Finance, Markets, and Privatization
Political Geography:
United States

16. Moral Hazard in the Policy Response to the 2008 Financial Market Meltdown

Author:
Andrew A. Samwick
Publication Date:
01-2009
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
The Cato Institute is the ideal place to draw lessons from the sub- prime crisis. The organization's mission focuses on the interaction of public policies with free markets and limited government. Even the most ardent believer in free markets must fully understand that individual liberty implies neither the nonexistence nor the indifference of government to economic affairs. Individuals live in freedom and peace when public policies are crafted in accordance with well-established rules and implemented with an eye toward effectiveness, not expansion. In the halls of government, we need sobriety and vigilance rather than apathy or empire building.
Topic:
Democratization, Economics, International Trade and Finance, Markets, and Privatization
Political Geography:
United States

17. Moral Hazard and the Financial Crisis

Author:
Kevin Dowd
Publication Date:
01-2009
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
There is no denying that the current financial crisis has delivered a major seismic shock to the policy landscape. In country after country, we see governments panicked into knee-jerk responses and throwing their policy manuals overboard: bailouts and nationalizations on an unprecedented scale, fiscal prudence thrown to the winds, and the return of no-holds-barred Keynesianism. Lurid stories of the excesses of “free” competition—of greedy bankers walking away with hundreds of millions whilst taxpayers bail their institutions out, of competitive pressure to pay stratospheric bonuses and the like—are grist to the mill of those who tell us that “free markets have failed” and that what we need now is bigger government. To quote just one writer out of many others saying much the same, “the pendulum will swing—and should swing—towards an enhanced role for government in saving the market system from its excesses and inadequacies” (Summers 2008). Free markets have been tried and failed, so the argument goes, now we need more regulation and more active macroeconomic management.
Topic:
Democratization, Economics, International Trade and Finance, Markets, and Privatization
Political Geography:
United States

18. Money and the Present Crisis

Author:
Gerald P. O'Driscoll Jr.
Publication Date:
01-2009
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
We remain in an economic crisis and financial crisis, one that Gary Gorton has named “The Panic of 2007” (Gorton 2008). The thesis of this article is that monetary policy has played a pivotal role. Under Alan Greenspan and now Ben Bernanke, the Fed has conducted monetary policy so as to foster moral hazard among investors, notably in housing (O'Driscoll 2008a). More generally, the crisis is the product of a “perfect storm” of misguided policy. Policies to encourage affordable housing fostered the growth of subprime lending and complex financial products to finance that lending. Regardless of the desirability of the social goal, the financial super- structure depended on housing prices never falling. Housing prices do fall sometimes, and did so decisively beginning in 2007 (Gorton 2008: 50).
Topic:
Democratization, Economics, International Trade and Finance, Markets, and Privatization
Political Geography:
United States, Europe, and New Zealand

19. Interest-Rate Targeting during the Great Moderation: A Reappraisal

Author:
Roger W. Garrison
Publication Date:
01-2009
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
In the era that has come to be known as the “Great Moderation” (dating from the mid-1980s), the Federal Reserve's policy committee (the Federal Open Market Committee or FOMC) pursued what has to be called a “learning-by-doing” strategy. The data that counted as relevant feedback—the unemployment rate and the inflation rate—seemed all along to be suggesting that the Fed was doing the right things. Even when the Fed lowered the Fed funds target to 1 per- cent in June 2003 and held it there for nearly a year, the economy appeared to be on an even keel and U.S. interest rates were in line with those in other countries. The historically low interest rates were attributed not to excessive monetary ease in the United States but to a worldwide increase in savings.
Topic:
Democratization, Economics, International Trade and Finance, Markets, and Privatization
Political Geography:
United States

20. The Way Forward: Incentives, Not Regulations

Author:
William Poole
Publication Date:
01-2009
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Most of the world today is concentrating not on the way forward after the crisis, but the way out of the crisis. This concentration brings the very real danger that steps taken now will cause problems later. The most obvious danger, perhaps, is that enormous government spending, here and abroad, will increase outstanding debt to a degree that will increase temptation to attempt to finance government budget deficits through inflation. Moral hazard is the less obvious, but perhaps more serious, problem we will face.
Topic:
Democratization, Economics, International Trade and Finance, Markets, and Privatization
Political Geography:
United States