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Last Resort: The Financial Crisis and the Future of Bailouts
The bailouts during the recent financial crisis enraged the public. They felt unfair—and counterproductive: people who take risks must be allowed to fail. If we reward firms that make irresponsible investments, costing taxpayers billions of dollars, aren’t we encouraging them to continue to act irresponsibly, setting the stage for future crises? And beyond the ethics of it was the question of whether the government even had the authority to bail out failing firms like Bear Stearns and AIG.
The answer, according to Eric A. Posner, is no. The federal government freely and frequently violated the law with the bailouts—but it did so in the public interest. An understandable lack of sympathy toward Wall Street has obscured the fact that bailouts have happened throughout economic history and are unavoidable in any modern, market-based economy. And they’re actually good. Contrary to popular belief, the financial system cannot operate properly unless the government stands ready to bail out banks and other firms. During the recent crisis, Posner agues, the law didn’t give federal agencies sufficient power to rescue the financial system. The legal constraints were damaging, but harm was limited because the agencies—with a few exceptions—violated or improvised elaborate evasions of the law. Yet the agencies also abused their power. If illegal actions were what it took to advance the public interest, Posner argues, we ought to change the law, but we need to do so in a way that also prevents agencies from misusing their authority. In the aftermath of the crisis, confusion about what agencies did do, should have done, and were allowed to do, has prevented a clear and realistic assessment and may hamper our response to future crises.
Taking up the common objections raised by both right and left, Posner argues that future bailouts will occur. Acknowledging that inevitability, we can and must look ahead and carefully assess our policy options before we need them.
The answer, according to Eric A. Posner, is no. The federal government freely and frequently violated the law with the bailouts—but it did so in the public interest. An understandable lack of sympathy toward Wall Street has obscured the fact that bailouts have happened throughout economic history and are unavoidable in any modern, market-based economy. And they’re actually good. Contrary to popular belief, the financial system cannot operate properly unless the government stands ready to bail out banks and other firms. During the recent crisis, Posner agues, the law didn’t give federal agencies sufficient power to rescue the financial system. The legal constraints were damaging, but harm was limited because the agencies—with a few exceptions—violated or improvised elaborate evasions of the law. Yet the agencies also abused their power. If illegal actions were what it took to advance the public interest, Posner argues, we ought to change the law, but we need to do so in a way that also prevents agencies from misusing their authority. In the aftermath of the crisis, confusion about what agencies did do, should have done, and were allowed to do, has prevented a clear and realistic assessment and may hamper our response to future crises.
Taking up the common objections raised by both right and left, Posner argues that future bailouts will occur. Acknowledging that inevitability, we can and must look ahead and carefully assess our policy options before we need them.
Hardcover
Published January 1, 2017
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About the author
Eric A. Posner
37 books85 followersEric Posner is the Kirkland & Ellis Professor of Law at The University of Chicago.
His books include Law and Social Norms (Harvard 2000); Chicago Lectures in Law and Economics (Foundation 2000) (editor); Cost-Benefit Analysis: Legal, Economic, and Philosophical Perspectives (University of Chicago 2001) (editor, with Matthew Adler); The Limits of International Law (Oxford 2005) (with Jack Goldsmith); New Foundations of Cost-Benefit Analysis (Harvard 2006) (with Matthew Adler); and Terror in the Balance: Security, Liberty, and the Courts (Oxford 2007) (with Adrian Vermeule). He is also an editor of the Journal of Legal Studies. He has published articles on bankruptcy law, contract law, international law, cost-benefit analysis, constitutional law, and administrative law, and has taught courses on international law, foreign relations law, contracts, employment law, bankruptcy law, secured transactions, and game theory and the law. His current research focuses on international law, immigration law, and foreign relations law. He is a graduate of Yale College and Harvard Law School.
His books include Law and Social Norms (Harvard 2000); Chicago Lectures in Law and Economics (Foundation 2000) (editor); Cost-Benefit Analysis: Legal, Economic, and Philosophical Perspectives (University of Chicago 2001) (editor, with Matthew Adler); The Limits of International Law (Oxford 2005) (with Jack Goldsmith); New Foundations of Cost-Benefit Analysis (Harvard 2006) (with Matthew Adler); and Terror in the Balance: Security, Liberty, and the Courts (Oxford 2007) (with Adrian Vermeule). He is also an editor of the Journal of Legal Studies. He has published articles on bankruptcy law, contract law, international law, cost-benefit analysis, constitutional law, and administrative law, and has taught courses on international law, foreign relations law, contracts, employment law, bankruptcy law, secured transactions, and game theory and the law. His current research focuses on international law, immigration law, and foreign relations law. He is a graduate of Yale College and Harvard Law School.
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Displaying 1 - 5 of 5 reviews
April 26, 2020
Really fascinating book. Central argument is that in fulfilling its Lender of Last Resort role, the US government circumvented or violated aspects of US law during the financial crisis (with focus on AIG, Fannie/Freddie, and GM/Chrysler). Further, many of these likely constituted takings insofar as the government took advantage of its role as a credit monopolist during a financial crisis to achieve goals other than economic stability. Posner doesn’t argue that these were actions necessarily, just that just compensation should have likely been given as the result of the governments actions which favored certain actors over others (the counterparties of AIG versus the shareholders; financial institutions holding GSE securities vs shareholders; and auto dealer franchisees and certain secured creditors vs pensioners and suppliers).
April 9, 2020
A clear history and thoughtful analysis of the 2007-09 financial crisis. The author gives an illuminating explanation of his view that the Lender of Last Resort (a combination of the Fed, FDIC and Treasury) stretched or broke the law, particularly in regard to Lehman, AIG, Fannie, Freddie and the auto companies. He makes numerous recommendations for legal and structural improvements for the LLR before the next round of bailouts, though that is obviously too late now! He does not seem to consider the possibility of more direct aid to consumers or breaking up the big financial institutions.
May 21, 2024
The book was about the bailouts of 2008. It was very technical about the law, and in general boring. His conclusions didn't even make sense to me. In general, I don't think that it is worth spending the time reading it.
May 6, 2024
Good book about the legality of bailouts during the 2008 financial crisis. Pretty objective, thorough, and well written. Good to hear solid legal analysis on this subject.
June 21, 2020
Best book I have read regarding the great recession
Displaying 1 - 5 of 5 reviews