The Financial Crash of 2008: An Illustrative Instance of the Separation of Risk from Reward in American Capitalism
Chapter Chapter 3 in Consequences of Economic Downturn, 2011, pp 45-62 from Palgrave Macmillan
Abstract Finance textbooks and Wall Street publicists never tire of describing senior bankers, executives, and traders as “risk-takers,” and in an earlier time, one dominated by the stand-alone speculator and investment bank partnership, this moniker had some validity. But such memories are in stark contrast to today, where those who make speculative trades take substantially fewer risks with their own wealth. More often, they take risks with the wealth of other people, often people they do not know and who are rarely consulted on the matter. As things now stand, it would be more accurate to describe the U.S. financial system as a place where the separation of reward from risk has become a well-instantiated practice (Prasch 2004). With the crash, this systemic separation of risk from reward is no longer a well-concealed aspect (or should we say principle?) of American public policy. The collective and uniform response of the Federal Reserve and the Bush and Obama administrations has been to ensure the rescue and resuscitation of the largest and most problematic financial institutions, while letting “Main Street” and homeowners struggle through on their own. This very public performance simply affirms that the largest banks are now in a position to set the parameters of the official discussions of what can be done (Johnson 2009; Johnson and Kwak 2010; Prasch 2010b; Prins 2009).1
Keywords: Financial Market; Asymmetric Information; Limited Liability; Canonical Theory; Complete Market (search for similar items in EconPapers)
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