In today’s New York Times, David Leonhardt writes, of a sixteen-year-old economics paper:
In the paper, they argued that several financial crises in the 1980s, like the Texas real estate bust, had been the result of private investors taking advantage of the government. The investors had borrowed huge amounts of money, made big profits when times were good and then left the government holding the bag for their eventual (and predictable) losses.
In a word, the investors looted. Someone trying to make an honest profit, Professors Akerlof and Romer said, would have operated in a completely different manner. The investors displayed a “total disregard for even the most basic principles of lending,” failing to verify standard information about their borrowers or, in some cases, even to ask for that information.
The investors “acted as if future losses were somebody else’s problem,” the economists wrote. “They were right.”
He goes on to distinguish between classic moral hazard and looting:
With moral hazard, bankers are making real wagers. If those wagers pay off, the government has no role in the transaction. With looting, the government’s involvement is crucial to the whole enterprise.
Ryan Chittum at CJR has a good take on the piece.
It’s clear that the system that led to the current economic clusterfuck needs some fundamental reform and regulation. The incentives to loot show up the hollow promise of the markets self regulating.