“If you don’t know who the sucker is at the table, it’s probably you,” runs an old poker saying. At the poker table of the current financial crisis, “We are the suckers.” Professor Russ Roberts writes his paper Gambling with Other People’s Money, “And most of us didn’t even know we were sitting at the table.”

The recent financial crisis has provoked a raft of contending claims as to whether the cause of the crisis is better attributed to market failure or political failure. Such claims are predicated on a presumption that markets and polities are meaningfully separate entities. To the contrary, we argue that contemporary…

Policymakers continue to seek viable alternatives to resolve large insolvent financial institutions. A better option is speed bankruptcy: a process of converting some long-term debt into equity, a more palatable option than using taxpayer funds to recapitalize large banks.

As part of a broad legislative effort to regulate hedge funds, Congress has introduced a bill that would require hedge funds to register with the SEC and comply with new record keeping and disclosure requirements. A much more effective method of regulating hedge funds would be to institute a strategy which effectively encourages markets to self-police by instituting financial regulatory policies that support self-regulation of hedge funds.

In the wake of the financial crisis, Congress is considering new regulations on non-traditional lending products like payday lending, although there is no evidence that such products were related in any way to the financial crisis. If enacted, the principal legislation, H.R. 1214 (the Payday Loan Reform Act of 2009), would limit the charge for a single-payment loan to an effective 391 percent annual rate ($15 per $100 two-week loan). H.R. 1214 also purports to limit borrowers to one loan at a time from a single lender, prohibit rollovers, and limit borrowers to one extended repayment plan every six months. Economic theory and empirical evidence strongly suggests that these paternalistic regulations would make consumers worse off by limiting their choices to unappealing alternatives.

In light of the 2007-2008 financial crisis, policymakers are reforming financial regulations in order to create a resolution system for large failing financial institutions. This paper advocates that speed bankruptcy, specifically overnight debt-to-equity conversions be considered as a viable option to recapitalize troubled financial institutions. At the very least, overnight debt-to-equity conversions could have been used to provide hundreds of billions of dollars of extra equity to weak firms in 2008, and could still be used the next time a firm that is ostensibly “too big to fail” comes close to going bust.

The financial crisis invalidated a naïve notion of “efficient markets,” but the most sophisticated version is still viable. Whereas the invalidated version holds that markets never err and always adjust instantaneously, the sophisticated version, associated with the ideas of Adam Smith and F. A. Hayek, holds that markets mobilize individuals to realize gains from trade and to innovate and thereby produce generalized prosperity.

The Great Recession (or the Great Hangover) that began in 2008 did not have to happen. Its causes and consequences are not mysterious. Indeed, this particular and very painful episode affirms what the best nonpartisan economists have tried to tell our politicians and policy-makers for decades, namely, that the more they try to inflate and direct the economy, the more damage the rest of us will suffer sooner or later.

In his testimony before the House of Representatives Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, Anthony Sanders discusses how to encourage the involvement of private mortgage insurers in the home mortgage market and how to reduce government involvement in the housing finance area.

Professor J.W. Verret discusses the question of fiduciary duties for Wall Street brokers and the possible implications new regulations could have on markets.

In his testimony, Professor Sanders explores the question whether Credit Default Swaps caused the Greek debt crisis.

In this testimony before the Senate Committee on Banking, Housing, and Urban Affairs - Subcommittee on Economic Policy, Professor J.W. Verret discusses the causes of short-termism in today's capital markets. He first explains how the terms short-termism and long-termism might be viewed differently by different groups and identifies two key drivers of short-termism.

Since the financial crisis in 2008, fueled by the bubble in the housing market, many homeowners are still facing foreclosures, as they can no longer afford their monthly mortgage payments. The government has tried to establish programs that will help home owners to stay in their homes. In this testimony Dr. Kling critiques the latest government program, the Home Affordable Modification Program, and compares home purchasing to the speculative nature of the decisions entrepreneurs make when they embark on business ventures.

Before the House Financial Services Committee, Mercatus Center's Financial Markets Working Group member Anthony Sanders highlights that the combined debt load for Fannie Mae, Freddie Mac, and the Federal Home Loan Bank stands at $8 trillion. Prof. Sanders recommends that we need to take immediate action to get the financial institutions and the investment community back in the game and wind down the Federal government’s involvement.

In this testimony, Professor Verret notes that current law being considered, H.R. 4537, attempts to contort the securities laws to regulate campaign finance risking and limiting the ability of companies to communicate with legislators by giving special interest institutional shareholders, such as unions, power to stop those communications. This bill does not limit union political spending in any way and has nothing to do with the investor protection goals of the Securities Exchange Act.

In this testimony before the House Financial Services Committee, Prof. Todd Zywicki discusses the negative impact of recently-enacted and contemplated future legislation in interfering with a wellfunctioning lending market and in creating an environment of uncertainty that discourages lending.

The current crisis is a crisis of misaligned incentives and the rational response of consumers and lenders to those incentives, not a crisis of mass consumer ignorance and exploitation. While some financial terms and products and the correlating regulatory environment impose substantial risk and dangers for buyers and lenders alike,…

The government's current approach to dealing with systemic risk - implicit and explicit guarantees and case-by-case bailout decisions - needs to change. A better job can be done to mitigate systemic risk, but solutions must be based on well-informed estimates of vulnerabilities.…

Statutory and regulatory mandates to change or limit executive compensation structures threatens to worsen the current financial crisis. Historically, compensation regulation has resulted in unintended consequences that weaken the overall financial system. Past regulation has actually increased the disparity between worker and executive compensation and the current proposal would make it harder for firms to hire and retain top talent. Better corporate governance structures would ensure that executives' salaries reflect the value they provide to the company and shareholders.

In response to the Obama administration's proposal to reform the country's financial regulatory system, this research summary highlights key points on proposed regulations about systemic risk, derivatives, securitization, and consumer protection, by several of Mercatus Center's Financial Markets Working Group scholars. This resource will help ensure that sound academic research…

Although there is no evidence that non-traditional lending products such as payday and title lending contributed to the financial crisis, Congress is considering new regulations on such products. However, economic theory and empirical evidence suggest that these proposals would hurt the very people they are intended to help.