Luigi Zingales, A capitalism for the people: Recapturing the lost genius of American prosperity

Abstract

In 1971 the federal government guaranteed a $250 million loan to Lockheed Aircraft. It was the first time in history that the federal government had come to the rescue of a single failing firm (or, more precisely, its creditors). By the end of the 1970s, Penn Central Railroad and Chrysler would also receive bailouts. In 1984, it was Continental Illinois. And on the eve of the ‘90s it was the creditors of hundreds of savings and loan associations. Nothing, however, would compare to 2008. In a single year, the federal government bought stake in or bailed out hundreds of private financial and automotive firms. The rules of the bailout game, if there were any, were not always clear. Having come to the aid of Bear Stearns (via J.P. Morgan) and Fannie Mae and Freddie Mac, the federal government stunned creditors when it let Lehman Brothers fall in midSeptember 2008. But just 2 days later, bailouts resumed when the Federal Reserve made an $85 billion emergency loan to insurer American International Group. The experience left a lot of people reexamining their beliefs about American capitalism. From then on, were all large firms assumed to have the full faith and credit of the federal government behind them? Was there any way to credibly commit not to bail out systemically significant financial institutions? What cultural and political norms and taboos had the bailouts shattered? And how did these changes affect the public’s perception of government and “free market” capitalism? We are fortunate that one of the people thinking about these questions was Luigi Zingales. He recorded his first observations on the crisis in a must-read piece in National Affairs titled “Capitalism After the Crisis” (2009). Now he has expanded those observations to book-length in A Capitalism for the People. Zingales is as qualified as anyone to address these questions, and that’s not just because he is an extraordinarily creative and productive financial economist of the University of Chicago’s Booth School of Business. He’s also an Italian emigre who is refreshingly unafraid to draw on his personal biography to make his case. Rev Austrian Econ DOI 10.1007/s11138-013-0213-0