Reading the new book Fragile by Design: The Political Origins of Banking Crises & Scarce Credit by Charles Calomiris and Stephen Haber gave me a completely new perspective on banking, credit markets, and why crises may occur. This could be the best economic book of the year as it explains why banking crises may occur because of the political structure of the country. This is not an indictment of the current regulatory environment or a story of the current crisis, but a history of how we may have gotten to this point through the cumulative choices and interaction between banks and government.
The authors provide a rich history and examples of their underlying thesis that politics and banking go hand in hand. The state and banking are closely intertwined and the banking system we have is the result of politics. This is a much deeper story than any about rent-seeking or captured regulators. It is more about the link between authoritarian and democratic institutions and the ability of banks to have enforceable contracts.
The rules of the game matter and whether the rules today will exist tomorrow when you lend money over time is critical with the type and amount of banking that exists. Democracies will lead to a different banking environment than a authoritarian regime. There has been a lot of talk about government regulation for banks, but little work has been done on providing context on the link between banks and government. This work fills the gap in ways that are not normally seen. The authors use case studies across countries and history to state their case.
This work should open a new set of research on banking to prove their underlying hypotheses. Seldom will we see this type of work perhaps change the direct of though on banking, regulation, and crises.
No comments:
Post a Comment