Last Resort: The Financial Crisis and the Future of Bailouts

Legal scholar Posner (Law and Happiness) revisits the financial meltdown of 2007–2008 and the immediate government response to it and makes a case for expanding the powers of federal agencies to intervene economically before another catastrophe occurs. Taking his book’s title from the Federal Reserve’s official function as the “lender of last resort,” Posner adopts the unique approach of homing in on the legality of specific actions rather than their political or pragmatic merits. To bolster his argument, Posner examines three of the highest-profile government interventions during the crisis—those concerning insurance giant AIG, mortgage lenders Fannie Mae and Freddie Mac, and auto titans General Motors and Chrysler. Basing his argument on interpretations of relevant clauses of the Federal Reserve charter and the U.S. Constitution, Posner demonstrates how the government’s actions expanded, bent, and (possibly) even broke the law, in the last case by taking equity from AIG in return for an $85 billion loan. He contends that expanding the government’s powers now—including to provide much-loathed bailouts to financial giants—would eliminate the need to stretch the law in such a way again. Unfortunately, Posner’s insightful analysis gets lost in a sea of jargon, such as “financial haircut” and “the floating leg of an interest rate swap,” limiting his topical book’s audience to fellow experts. (Mar.)