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Gambling with Other People's Money

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GOVERNMENT GUARANTEED SUBPRIME EXACTA BOX
"What changed in recent years that created such a destructive set of decisions that culminated in the collapse of the housing market and the financial system," asks Russell Roberts, a professor of economics from George Mason University. Glad you asked! "In this paper, I argue that public-policy decisions have perverted the incentives that naturally create stability in financial markets and the market for housing. Over the last three decades, government policy has coddled creditors, reducing the risk they face from financing bad investments. Not surprisingly, this encouraged risky investments financed by borrowed money. The increasing use of debt mixed with housing policy, monetary policy, and tax policy crippled the housing market and the financial sector. Wall Street is not blameless in this debacle. It lobbied for the policy decisions that created the mess."

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