Bubble, Bailout, and Cover-Up
By Arnold Kling
it is very hard to imagine that heavily regulated banks could have engaged in such extreme risk-taking without the support of regulators. Nobel prize-winning economist George Stigler warned long ago about “regulatory capture” — the tendency for regulated firms to get protection from their regulators — and the authors provide considerable evidence of it in this book.
He is reviewing the new book by Gretchen Morgenson and Joshua Rosner. I have not yet read the book, but clearly I should.
One way to think about the financial crisis is that it consisted of a bubble, a bailout, and a cover-up, with a consistent set of government players involved in each phase (Geithner, Dodd, Frank). The bubble phase consisted of encouragement of risk-taking by Freddie, Fannie, and large banks. The bailout phase consisted of committing the taxpayers to sustaining those institutions. And the cover-up phase was the demand for financial “reform” culminating in the Dodd-Frank bill. All this hue and cry was really an exercise in promulgating a narrative that the crisis was caused by an “atmosphere of deregulation,” when the true narrative would be one of misguided housing policy, crony capitalism and cognitive capture of bank regulators by the large banks.