Last Resort (Hardcover)

The Financial Crisis and the Future of Bailouts

By Eric A. Posner

University of Chicago Press, 9780226420066, 272pp.

Publication Date: April 2, 2018

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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.

About the Author

Eric A. Posner is the Kirkland and Ellis Professor of Law at the University of Chicago Law School. He is the author or coauthor of several books, including Law and Happiness and The Perils of Global Legalism.

Praise For Last Resort: The Financial Crisis and the Future of Bailouts

“A startling and important book.”

— Martin Wolf, Financial Times

“One of the most succinct and lucid explanations of the sources and dynamics of the crisis that I have read. . . . The book’s specific legal arguments are particular to the US, . . . but Posner’s general arguments about the need for robust underpinning of the financial system, and well-defined powers of intervention and rescue, are relevant to any country hosting a complex financial centre.”

— Times Higher Education

"Rather than blaming the government or the corporations . . . [Posner] emphasizes how outdated the rules regulating these corporations are and how the public would be better served in future financial crises—which he posits are largely unavoidable—by changing the law."

— Booklist

"Posner would like to see an LLR with broad powers to lend when collateral is unavailable or impossible to value, make capital injections.and direct firms to enter financial transactions... It is a troubling conclusion:the modern financial system requires an LLR with powers no political structure is likely to grant." 

— F and D Magazine

“A hazardous bailout, a meltdown-averting loan of last resort, or both? Posner explains how the administration and the Fed reduced the severity of the Great Financial Crisis by skating near and sometimes beyond the boundaries of their authorities. As usual, he stirs things up!”

— Darrell Duffie, Stanford University

“Posner’s argument that various government interventions violated the Constitution is provocative and cuts against conventional wisdom. Although there are now bookshelves full of crisis postmortems, this is one of the few that rigorously analyzes the legality of the government’s bailout efforts. Posner also outlines the ways we can overhaul the government’s powers to improve the legality and effectiveness of its crisis management capabilities.”

— Erik Gerding, author of Law, Bubbles, and Financial Regulation

“Whether legal constraints did or did not constrain the actions of the official sector during the global financial crisis had been insufficiently explored. Posner’s book brilliantly fills this void and is a must read for anyone interested in the crisis.”

— Anil Kashyap, University of Chicago Booth School of Business