Gambling with Other People’s Money: How Perverse Incentives Caused the Financial Crisis

by Russell "Russ" Roberts

What caused the Financial Crisis of 2008? While government mandates and private sector mistakes did contribute to the crisis and can be blamed at least in part for what happened, this book takes a different approach. Russ Roberts argues that the true underlying cause of the mess was the past bailouts of large financial institutions that allowed these institutions to gamble carelessly because they were effectively using other people’s money. The author warns that despite the passage of Dodd-Frank, it is widely believed that we have done nothing to eliminate ‘Too Big to Fail.’ That perception allows the largest financial institutions to continue to gamble with taxpayer money.

Genres: Economics, Business, Politics, Nonfiction, American, History

126 pages, Paperback

First published January 1, 2019

Reviews

[Kevin · Rating 4 out of 5]

I don't have the economic chops to really challenge or verify the underlying facts of this slim volume but I trust Roberts and what he lays out is depressing. Basically, the government insisting on bailing out investors has incentivised risky behaviour, led to the financial crisis and involved a large transfer of wealth from taxpayers to very wealthy Wall Street types. The system is not capitalism but crony capitalism. Not sure there is a political voting block able to make any dent in this problem in the near future which is sad and frightening.

[Brian · Rating 4 out of 5]

Great book to understand what happened with the financial crisis of 2008/2009. If you're already a fan of Russ Roberts on Econtalk, none of the ideas here will be new. But the data and robust explanations may be more robust than the podcast usually allows.
Reads a little like a thesis or college essay more than a page-turner, but if you're reading about this topic for fun than you likely don't care.

[Ronald J. · Rating 5 out of 5]

Russ Roberts hosts my favorite podcast, EconTalk. This short book is a cogent, well-written exploration of the financial crisis (2008-10), a good complement to others I have read on the crisis, such as Thomas Sowell’s book, The Housing Boom and Bust. Beginning with Russ’s favorite line from Hayek’s The Fatal Conceit: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” His claim in the book is that “government’s treatment of financial institutions in the decades preceding the crisis distorted the natural feedback loops of profit and loss that balance risk-taking with prudence. Ultimately, the only participant unable to place the risk of these activities onto someone else was the taxpayer.” What happened wasn’t the failure of capitalism, but the presence of crony capitalism, along with the moral hazard of bailing banks out. We privatized the profits and socialized the losses. Robert’s cites Milton Friedman who pointed out that “capitalism is a profit and loss system. The profits encourage risk-taking. The losses encourage prudence.” I loved the poker analogy used in the book, and as Russ points out: There’s an old saying in poker: If you don’t know who the sucker is at the table, it’s probably you. The taxpayers were the suckers in this story. Is the USA a capitalist society? We are what we do, not what we say. The financial crisis of this period highlights very well Milton Friedman’s advice: “It’s nice to elect the right people,” he said, “but that isn’t the way you solve things. The way you solve things is to make it politically profitable for the wrong people to do the right things.” If you want a well-balanced analysis of this crisis, you should read this book.

[Erik Rostad · Rating 4 out of 5]

A quick book about the 2008 financial crisis. What caused it? Russ places the blame on the implicit guarantee of bailouts and the corruption of incentives. He quotes Milton Friedman that Capitalism is a profit and loss system. Profits encourage risk-taking and losses encourage prudence. When you mess with that formula by guaranteeing bailouts and those partaking of the risk-taking have that as a consideration, then the risk of loss is mitigated and encourages risk-taking. The ultimate losers in this game are you and me - the taxpayers. Our money is used for the bailouts. Russ points out that the executives of many of the firms taking these risks invested their own money in safer investments. But since their firms were mostly using other people's money and there was the implicit guarantee of bailouts, they took great risk with sub-par investments knowing the taxpayer would fit the bill if anything went wrong. It's evil and corrupt, but Russ says not to blame Capitalism but to rather blame Crony Capitalism and perverse incentives.

[Valdívia Magno · Rating 4 out of 5]

You have a financial and housing crisis approach in this book, and why this kind of crisis happened. Some policies and politicians violate democracy rescuing riskier institutions. But this is not capitalism. In the game of capitalism you have profits and losses, but you have to handle that. So this kind of institutions never learn the lesson because they have somebody to support the losses: the taxpayer.

[Amanda · Rating 4 out of 5]

Good but dense

3.5/5 stars rounded to 4. Good explanation of the housing bubble/financial crisis. But difficult to understand if you don't know much about financial and monetary policy or banking. Will definitely make you angry at Wall Street and Politicians. Something more people should read, but I can't say it's super easy or enjoyable.

[Raymond Jones · Rating 4 out of 5]

You are the sucker at the poker table you didn't know you were sitting at

The long answer (but a short book!) on who was responsible for creating the housing crisis. Sadly, the taxpayers footed the bill.

[Fotis Koutoulakis · Rating 5 out of 5]

This book helped me really understand what happened in 2008.

[Eduardo Blasco · Rating 4 out of 5]

Russ Roberts provides an insightful explanation of the 2008 financial crisis. Terrifying to think that the incentives the author posits that caused the crisis are still prevalent today.

[Stephen · Rating 4 out of 5]

While I'm still trying to understand the complexities of the financial market itself, let alone what happened to it in '07-'08, Roberts' essential point is communicated well.

[William Suplee · Rating 4 out of 5]

brief over view of the agency problem and the corrupt bargain between regulated and regulators

[Blake Jones · Rating 3 out of 5]

Not much to say, quick read, and the last 10 pages summarize well Roberts perspective and recommendations regarding incentives, bailouts, etc.

[Christopher Winer · Rating 5 out of 5]

Excellent economic analysis

Russ Roberts is a fantastic economic educator and this book does a wonderful job explaining complex subjects in layman's terms.

[Dani · Rating 4 out of 5]

Looking back at the housing crisis, Russ Roberts examines how federal policy encouraged risky financial decisions by investment firms, leaving the tax payers with the bill

[Jonathon Ross · Rating 4 out of 5]

A troubling psychological profile laid out against the backdrop of the financial crisis. The information is well presented and easy to absorb.

[Pedro Pinto · Rating 3 out of 5]

A great Essay/Book (<100 pages) with a different and sound perspective on the root-causes of the financial 2008 crisis.

I really liked the clarity, rhythm and conciseness of the arguments, presenting them in a simple and to the point approach, instead of prolonging them to exhaustion as some authors do without any added- value.

Do recommend its reading!