Good Summaries to Help Understand the Financial Turmoil

Lynne Kiesling

Last week at Freakonomics, Doug Diamond and Anil Kashyap had a great guest post to help put it in perspective, and I recommend it to all.

Yesterday Steve posted a link to a critique of Paulson’s bailout plan by Luis Zingales. A must read. His conclusion:

Do we want to live in a system where profits are private, but losses are
socialized? Where taxpayer money is used to prop up failed firms? Or do we want to live
in a system where people are held responsible for their decisions, where imprudent
behavior is penalized and prudent behavior rewarded? For somebody like me who
believes strongly in the free market system, the most serious risk of the current situation
is that the interest of few financiers will undermine the fundamental workings of the
capitalist system. The time has come to save capitalism from the capitalists.

This “saving capitalism from the capitalists” meme echoes the ideas in Steve Horwitz’s post from yesterday in which he criticizes policy that focuses on creating “market stability”; this stability is always in the interest of the market participants, but when administratively imposed may come at a great cost to others, in this case taxpayers.

Finally, I’m glad that Tyler Cowen has been discussing OTC versus exchange trading and credit default swaps, despite his failure to note my contribution to starting the discussion rolling :-). Craig Pirrong from Streetwise Professor weighs in on the OTC post in the comments, and the whole thread is well worth a read.