This is the first book that takes an in-depth look at the connection between politics and banking crises. What led you to the topic?
Stephen Haber at Stanford and I spent the better part of the last 30 years working separately on issues of banking system risk. And that work kept revealing the impact of political influences on banking systems.
If you talk to anyone who’s ever run a bank, or any journalist who covers banking in depth, they’ll tell you that politics is hugely important. Yet in a lot of academic analyses, politics is little more than a footnote. We wanted to know — especially in light of the most recent crisis, but also of the last 35 years, in which over a hundred countries — including countries as different as England, Russia, Argentina, and Iceland — have experienced banking crises, why banking systems are sometimes dysfunctional and sometimes successful, and why some countries manage to make transitions from dysfunctional systems to functional ones.
And we wondered if politics was critical to understanding that. And so we began to examine various countries’ banking histories in light of their political histories: where a country’s constitution came from, how it was settled, what system of government it has. We saw that these factors might be the main drivers of banking function or dysfunction, both in terms of instability and scarce credit. Having researched this subject for three decades, we knew that this was more than plausible. It was the story.
For most people, the Financial Crisis of 2008 was an unexpected, unforgettable, and harrowing event. For Charles Calomiris of Columbia University and Stephen Haber of Stanford University, however, the crisis was just the latest in a long series of banking crises throughout American history. By their count, the United States has endured 12 banking crises since 1840. In their view, the more surprising and consequential number is the number of banking crises experienced by Canada during the same time period: zero.
In Fragile by Design, Calomiris and Haber set out to explain why some countries, like the United States, appear prone to banking crises, while other countries, like Canada, have been crisis free. Their conclusion is that it all comes down to politics. While this may appear to be an easy answer, their account of how politics shapes banking systems is a must-read for anyone interested in understanding the complex, political foundations of banking.
Fragile By Design has been selected for the long list for the 2014 Financial Times and McKinsey Business Book of the Year Award. The Business Book of the Year Award – recognised as the leading business book award – highlights ground-breaking books which explore important business and economic issues. The long list was selected from over three hundred titles entered for the 2014 prize.
Last year’s winner of the book award was The Everything Store: Jeff Bezos and the Age of Amazon by Brad Stone. The World is Flat by Thomas Friedman won in 2005.
A shortlist for the Business Book of the Year Award will be announced in New York on September 24th, and the winner will be announced on November 11, 2014.
July 14, 2014 By Charles Calomiris and Stephen Haber
Why are banking systems unstable in some countries – but not in others? Charles Calomiris and Stephen Haber use the examples of the United States and Canada to reveal how a mix of politicians, bankers and other interest groups make financial crises more likely to occur
Ken Dryden’s triumphs as goalie for the Montreal Canadiens — five Vezina Trophies; five Stanley Cups — are remembered today almost as keenly by almost as many Canadians as way back in the 1970s when he achieved them.
Afterwards, he went into politics, as a Liberal, and made it into the cabinet. He lost his seat in 2011.
Ever since, Dryden’s abiding goal has been to make Canada a better place.
We get the banking systems we deserve or, more precisely, that our political systems choose. The US has had 12 systemic banking crises since 1840, while Canada has had none. In some cases, therefore, the outcome of political bargaining is stability and in other apparently not dissimilar cases it is instability. Better awareness of how the political forces work might lead to superior bargains. But this informative book does not leave the reader optimistic. It is hard to shift bad political equilibria…
Dodd-Frank has enshrined bailouts while pretending to get rid of them.
From Charles W. Calomiris and Stephen H. Haber’s new book “Fragile by Design: The Political Origins of Banking Crises and Scarce Credit”:
It is challenging to assemble a winning coalition of like-minded people able to overcome the opposition of those that already control banking policy. Crises may mobilize constituencies for change, but powerful interests often succeed in using the crisis to strengthen their power. That was the result in 1913, when the Federal Reserve was founded to facilitate the operation of a fragmented banking system rather than to address the structural problems of unit banking. In the 1930s, instead of addressing the vulnerability of the banking system to agricultural income fluctuations and unit banking—the primary sources of bank failures in the preceding years—bank regulatory reforms further protected small, rural banks by instituting federal deposit insurance and new regulatory limits on bank consolidation. The regulatory reforms of 1989-91 wound down insolvent savings and loan associations and tinkered with regulatory capital requirements without actually constraining banks’ and [government-sponsored enterprises’] abilities to undertake risk at public expense. In fact, banks made ample use of the new capital-requirements framework to build the hidden risks that revealed themselves in the 2007-09 subprime crisis. As of this writing, the reforms introduced in the wake of that crisis have done little to end the subsidization of housing risk, to prevent banks from continuing to abuse the same system of capital regulation to hide risks in the future, or to prevent too-big-to-fail bailouts. Indeed, Title 2 of the Dodd-Frank bill enshrined and institutionalized those bailouts while pretending to get rid of them.
“[The book] is a tour de force analyzing why banking, credit availability and banking crises vary so dramatically across countries.” The authors “make a persuasive case that among economically developed democracies, the U.S. has been uniquely prone to banking crises due to populist political influence since the early 19th century on the banking system.” — Eric Grover, principal at Intrepid Ventures
The mortgage market in Carney country is enviably dull – as is the broader financial system
Tim Geithner’s memoir, published last month, tells us of his life as a firefighter: constantly on call to extinguish a fresh blaze. His baptism of fire, as it were, was in the Mexican financial crisis of 1994: he gained more firefighting experience when called out to Thailand – followed in short order by South Korea then Russia. There was a period of recuperation until the mother and father of all conflagrations broke out close to his fire station. From his experience of these blazes, he warns us to keep a close eye out for any signs of flames and to apply overwhelming jets of water at every opportunity.
But there are many things wrong with this analogy. The fires in question are not natural phenomena, like hurricanes and earthquakes. They are the product of human agency – even more so than bush fires. And, although Mr Geithner has noticed that wherever he goes the same group of arsonists has been there ahead of him, he has nothing but disdain for “old testament moralists” who think it might be better to let some buildings and their occupants burn.
In addition, the stuff used to douse the fires is not cold water but a stream of liberal credit – precisely what set the blaze alight in the first place. Better, perhaps, to limit access to matches and petrol, and to construct firebreaks. Perhaps the problem is one for the police as well as the fire service. Handcuffs might be as useful as the fire hose.
A different account of the origins of financial crises is to be found in a recent book by Charles Calomiris and Stephen Haber. They begin with an obvious question, which Mr Geithner has not thought to ask. Why are financial crises common in the US, and even more so in its southern neighbour, Mexico, but almost unknown in Canada? . . .
Canada has avoided crises for 180 years, while we have been prone to them. Can we recreate its stability here?
As the worst financial crisis in generations hit the United States in 2007 and 2008, Canada was a pillar of resilience.
No Canadian financial institutions failed. There were no government bailouts of insolvent firms (just a couple of lending programs to address market volatility relating to problems in the United States). Canada was the only G-7 country to avoid a financial crisis, and its recession was milder than those it experienced in the 1980s and early 1990s. For the last six years, the World Economic Forum has ranked Canada first among more than 140 countries in banking stability.