Commenting on the health of big U.S. banks last week, former Fed Chairman Ben Bernanke wrote on his Brookings blog that “a lot of progress has been made (and more is in train) toward reducing the risks that large, complex financial institutions pose for the financial system and the economy.” Bernanke’s observation came after Minneapolis Fed president Neel Kashkari’s recent commentary about the need to reduce the alleged problem of “Too Big To Fail” within banking. Some readers could be excused for wondering why Bernanke would have any opinion on the matter at all.
For most people who see The Big Short, what it teaches about the 2008 financial crisis will likely be the sum total of their knowledge about the event. And that is troubling. The movie is entertaining and offers a good description of securitized mortgages and similar financial instruments but oversimplifies the cause of the crisis as the greed of bankers. Worse still, it omits important facts that about the crisis that are at odds with this explanation.
The Big Short has been nominated for Best Picture. Its great commercial and critical success may portend Hollywood’s growing capacity to manipulate public opinion, because the film perfects a smoothly innovative form—the hybrid fact-fiction documentary. Except for Michael Burry, the characters are fictional but loosely based on real people. This fictionalization creates a powerful mechanism for spinning the facts to support a tendentious and politically motivated thesis.
The movie’s most important omission is the role of government in creating the crisis.
2016 is shaping up as an election in which one of our parties will emphasize the need for growth and the other will call for greater economic equality. These concepts are often seen in substantial tension with one another. In my view, however, if the government encourages innovation we can have both growth and greater equality in the relatively short run.
As I wrote in yesterday’s Washington Times for the celebration of Liberty Month:
In this age of accelerating technology, there is no more important policy than to encourage innovation. Innovation is the primary source of economic growth. New innovative businesses, like Google and Uber, transform our lives for the better. And innovation builds on innovation, compounding growth from generation to generation. As the Nobel Prize winning economist Bob Lucas once said: “Once one thinks about exponential growth, it is hard to think about anything else.”
Innovation in the modern era also tends to make us more equal. Innovation creates a stream of new ideas that are rapidly enjoyed by the great mass of people. Material goods are scarce, because individuals can by and large not enjoy the same material simultaneously. But ideas can be enjoyed by all. To be sure, some innovations are patented, but these patents expire. And, as better innovations come along, the old patents rapidly become less valuable. That is one reason that smart phones have so rapidly become available to people of modest means. Thus, the greater the supply of innovations, the great the common pool from which almost everyone can benefit quite rapidly.
We thus need to ask all Presidential candidates what they will do to promote innovation.
Ted Frank, founder of the Center for Class Action Fairness, comes to Liberty Law Talk to discuss class action abuse and the need for reform of much of the current system. The Fallacies of States' Rights or the problems created by John Marshall's nationalism? Adam Tate considers both notions in this week's review essay, "The Fallacies of Marshallian Nationalism." Getting education right in America: Russ Roberts talks with Eric Hanushek of Stanford on the costs of having a mediocre education system. JP Morgan's 4 parts: investment banking, traditional banking, asset management, and private equity are worth more separately than their present combination: So…
So we were told with the passage of the Dodd-Frank Act that too big to fail was now behind us. Except it isn't. In fact, the conditions supporting bank bailouts have only gotten worse with the nation's largest banks actually increasing in size and scope since 2008. TBTF, however, goes back farther than you might think. This podcast with Vern McKinley on his book, Financing Failure, discusses the regulatory history of bank bailouts rather than winding down insolvent institutions. Contrary to the Hank Paulson and Ben Bernanke narrative of the 2008 crisis, although the scope of the problem was new,…
The May Liberty Forum is now available and features a great exchange among Greg Weiner, Stephen Knott, and George Thomas on the need for Congress to re-assume its full powers of deliberative government. Weiner asks if we are all Wilsonians now? Neoconservatives, it should be said in fairness, brought the 28th President’s ideology through the front door in the plain light of day in the form of a moralized and expeditionary foreign policy. What few noticed is what got simultaneously smuggled in the back: a constitutional philosophy that suppresses Congress, elevates the Presidency and replaces deliberation and an awareness of human…