Jane Gravelle's Review

Gambling with Borrowed Chips: The Common Misdiagnosis of the Crisis of 2007–08
by Christopher C. Faille

Abbott Press, Bloomington, IN, 2012.

159 pages, $13.99.

Reviewed by Jane G. Gravelle

In Gambling with Borrowed Chips, Christopher C. Faille offers both a claim about the cause of the financial

crisis of 2007–2008 and a set of prescriptions to remedy it. Most of the book, however, is taken up by

a narrative about the players and events of the crisis as well as some of the history that led up to it. (I particularly

enjoyed the chapter looking back to the Middle Ages and the sin of usury.)

Gambling with Borrowed Chips is not a scholarly work, in that it has no references or footnotes. But

the book is readable and entertaining, although not entirely focused, and Faille explains a lot of concepts and

practices along the way.

I don’t regret the time I spent reading the book. But, ultimately, one presumes that an author cares most about

his analysis and his prescriptions, and I see very little in the book to justify either. Faille has a habit of making a

pronouncement about something and then dropping the train of thought to turn to something else, making

it unclear at times what he really intends. I will interpret as best I can.

Faille’s analysis is that the commonly cited causes of the crisis—speculation combined with leveraging,

deregulation, and other problems—are not, in fact, its causes. He apparently views the cause as

the expansionary monetary policies of the Board of Governors of the Federal Reserve System, a claim that

he appears to make based on the low interest rates set by the Fed. (In other parts of the book, he also seems

to blame the Fed for shoring up the economy when asset prices were falling during the Greenspan years.)

I can agree with Faille’s general proposition that speculation is not a problem in and of itself, even if

the funds with which one speculates are borrowed. Risk-taking, the term I would prefer, is an important part

of economic activity, as is borrowing. The problems arise not from borrowing funds to make risky investments,

but from engaging in this activity with poor information and in ways that cause those other than the risk-taker

and the creditor to suffer the consequences of a negative outcome.

Like most economists, I think that a number of factors contributed to the crisis, including many of those that

Faille rejects, such as lack of oversight, excessive leveraging, and poor risk management by some large financial

institutions. I cannot undertake a full discussion of these issues in a book review, but I suggest that the

reader take a look at what an expert says—namely, what Ben Bernanke, the chairman of the Federal Reserve

says. His accessible testimony on this subject before the Financial Crisis Inquiry Commission on Sept. 2, 2010,

discusses the triggers (such as subprime mortgage loans and increased reliance on short-term funding by

shadow banks) and the existing vulnerabilities in the financial system that resulted in a financial panic that

turned into an economic downturn. 1 Of course, the Fed chairman is vilified in some quarters, as is often the case

 with powerful persons, but he is widely respected in the economics community. Bernanke’s arguments are

so clear that a reader without economics training can follow them.

There is little evidence for the causal factor that Faille advances—namely, easy money. It is certainly

hard to make the case that monetary policy was excessively loose: inflation continued to be stable and remained

at the same low levels, more or less, that it had been since the mid-1980s. Accelerating inflation while at full

employment, rather than low interest rates, should be the sign of easy money. Interest rates on long-term

debt, such as mortgages, had been falling (indeed had been falling since the late 1980s) but not at an overly

dramatic rate at the time leading up to the financial crisis. The fall of interest rates on long-term debt and other
borrowing may be partially related to the increasing expectations of low inflation rates and perhaps also to
the inflow of capital from abroad. In his testimony to the Financial Crisis Inquiry Commission, Bernanke also
considered monetary policy, but for several reasons that seem compelling to me, he did not consider monetary
policy closely related to the principal trigger—the housing finance crisis.

If Faille’s analysis of the cause of the crisis is questionable, his prescriptions to remedy it—whether or not
the analysis is correct—can only be described as extreme. Faille presents his solutions at the end of the book,
unaccompanied by any analysis of the benefits and costs of the provisions. As with his take on the cause
of the crisis, Faille simply asserts his prescriptions without making a case for them.

Faille’s first two proposals—to abolish legal tender and to abolish the Federal Reserve—are linked in
some ways. Because Faille does not spell out anything beyond “abolishing legal tender,” I take that phrase,
based on some Internet surfing, as a code to mean a return to commoditylinked money—that is, the gold standard.
(In some places, Faille, hoping that the United States would adopt “sound” money, seems to be talking
about using other countries’ currency, which again would presumably be the gold standard. I have no idea
how we would go about using other countries’ currency.) One hopes that whatever Faille is proposing would
be done with an orderly transition; it took many years and a serious and prolonged economic downturn for
the United States to return to the gold standard after the Civil War.

A return to the gold standard (or some form of commodity-linked money) is espoused by a small but
vocal group, which finds few supporters among economists. In fact, most economics textbooks, for good
reason, devote no more than a page or two to explaining the gold standard and how the U.S. and other
countries’ economies moved away from commodity money to fiat money (money backed by the promises of

the government). Advocates for the gold standard would argue that tying money to a commodity limits the ability

of government to engage in excessive money creation and inflation. Of course, there is no evidence that

the U.S. government has been guilty of that since at least the mid-1980s; inflation has been low and relatively


The very advantage cited for a gold standard is also its cost: such a money standard does not allow flexibility

to manage the economy, which has been, since the Great Depression and its aftermath, a central concern

of economic policy. Gold discoveries can spark inflation, and, if the supply of gold does not increase enough to

support economic growth, deflation and economic contraction result. The period when the United States had a

pure gold standard (1879 to 1933) was marked by extensive volatility in output and prices as well as by financial

panics. This volatility is documented, for example, in an encyclopedia entry by Michael Bordo, an economics professor

at Rutgers University.2
Or, if a visual picture is more appealing, then take a look at a graph of percentage changes in output from 1821 to 2007

on page 4 of a Congressional Research Service report that I co-authored. 3

The true gold standard period lasted from after the Civil War until the Depression, ending in 1933. Indeed, one could

argue that it was a significant contributing factor to the Depression, because it limited the ability of the Federal Reserve

to perform its function of lender of last resort. Even the recent contraction looks mild compared to the swings in

output in the later 19th and early 20th centuries. (Faille seems to believe that the gold standard was restored after

World War II, but that standard only applied to international transactions and even then in a limited fashion. Dollars held

domestically could not be converted into gold. This era cannot be characterized as being on the gold standard.)

The Federal Reserve actually coexisted with the gold standard for 20 years, with the Fed functioning

primarily as a lender of last resort. This function was needed in part to deal with the rigidity of the gold standard

itself, which provided insufficient money, particularly around harvest time. Today, the Fed’s primary function

is to manage the economy and attain the objectives of full employment and price stability. The Fed or

a similar institution with that responsibility is necessary with fiat money, but some sort of institution would

probably also be needed with a gold standard.

On the whole, things have gone reasonably well—so well, in fact, that economists referred to the most recent

period as the Great Moderation. The 2007–2008 financial crisis does not change the fact that, for many years,

the economy enjoyed full employment and low inflation relatively undisturbed by business cycles.

Avoiding business cycles entirely is not possible: the economy is too complex and prediction is too difficult.

Moreover, even if higher interest rates could have deflected the financial panic, would we have traded it for 25

years of chaos and contraction? The best we can do now is not to throw the baby out with the bath water, but

to take what lessons we can from recent events, just as we did after the 1929 crash. Those lessons mostly

point to regulatory changes that have been undertaken, although whether they strike the right balance between

controlling systemic risk and allowing markets to work efficiently is never easy to know.

Faille’s third proposal is to eliminate the idea of “too big to fail.” I won’t dwell on this issue because

Chairman Bernanke did so quite succinctly in the testimony referenced above. As Bernanke pointed out, it is

not enough to assert that the government will let failures fail in the future; that assumption is not credible. In the

midst of a crisis, the government is unlikely to hold to such a standard if it means disaster for the broader economy,

as it well might. Rather, Bernanke suggested regulatory changes. 

Faille’s final proposal is to “learn greater respect for the profession of accounting.” Because I’m not sure what
Faille specifically proposes, I have no comments on this prescription.

If you are interested in what happened during the financial crisis of 2007–2008, then you might want to
read Gambling with Borrowed Chips for its descriptions of the players and events. But I would not advise relying on it to

guide your views on economiuc policy.
Jane Gravelle is senior specialist in economic policy at the Library of Congress’ Congressional Research Service.
This review does not reflect the position of the Congressional Research Service.
In this review, Gravelle’s historical discussions were greatly assisted in by two
Congressional Research Service reports by G. Thomas Woodward:
Brief History of the Gold Standard in the United States,
Report 98-986E (Dec. 5, 1996),
Money and the Federal Reserve System: Myth and Reality
Report 96-672E (July 31, 1996).

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