Tags: Calomiris | banks | crisis | regulation

Scholars Look at Government and Banking Industry

By    |   Wednesday, 19 Feb 2014 07:05 AM

The American Enterprise Institute (AEI) hosted a book presentation Feb. 12 for Fragile by Design: The political Origins of Banking Crises and Scarce Credit, by Charles Calomiris of Columbia Business School and Stephen Haber of Stanford.

The book compares the relationships between countries and banks that have been more or less crisis-prone during a 40-year period. After the presentation by Calomiris, comments were offered by Paul Kupiec and Alex Pollock, both of AEI.

In his introduction, Pollock laid out the fundamental principles discussed in the book:

1. Banking arrangements must be understood as a mutually profitable deal between banks and politicians.

2. These deals vary among countries, with some robust and others prone to collapse.

3. Modern governments need banks, not least to lend to the government itself, and in exchange, governments grant banks various privileges.

Calomiris began his presentation by expounding an idea that has also been the consistent theme of these articles — namely that what is referred to as the financial crisis, did not just happen suddenly in 2008, but rather is the latest episode in a series of crisis events marked by insolvency of the industry, on balance, and runs and other periodic, disorderly events, amounting to "a huge number of crises over the past 40 years, with very few countries able to avoid at least one."

He observed that this 40-year period is "the most crisis-prone in all of world history," and went on to assert that having banking is a good thing for an economy, a premise I doubt, but he find that having stable and abundant credit as a percentage of GDP is "extremely rare."

Calomiris noted that most of the technology of banking had already been invented by the mid-18th century in Scotland, "so this isn't rocket science." He asked why that technology, which enabled lending to promote economic growth, hasn't been exported to the rest of the world 250 years later.

The author identified six countries that have enjoyed abundant credit without crises, and five of these are islands or city-states: Singapore, Malta, Hong Kong, Australia, Canada, and New Zealand. Calomiris theorized that these are politically homogeneous countries, so that it isn't possible for a subgroup to gain control over the banking system. His theory about the largest of the six countries is that they have a history of anti-populist constitutions, making it "hard for a subgroup of the population to capture control of the financial system at the expense of other people."

He found that the countries with the worst-performing banking systems tend to be autocracies marked by "corruption and disastrous governance." However, Calomiris hastened to add that "being a democracy is not itself a solution to endemic banking crises." Comparing Canada and the United States, he found that since 1840, the United States has had a dozen banking crises, whereas Canada has had zero.

In a departure from common scholarly practice, Calomiris decided to go back and look at what actually happened, and he concluded that "there were not a lot of hard calls; it was kind of obvious." He found three eras in American banking history: 1) the government/big bank partnership/crony capitalism; 2) Hamilton's Undoing — a stable partnership between agrarian populist landowners and single-office banks; and 3) since 1980, the government/nationwide, "too big to fail" bank/urban populist partnership, with bankers buying off rent-seeking urban opponents of the mergers that would allow those banks to achieve too big to fail status.

Calomiris concluded that the banks, Fannie Mae and Freddie Mac, received weak prudential regulation, the urban activist groups received enormous payoffs to the tune of nearly $3 trillion and everyone else was a loser.

(Archived video can be found here.)

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Robert-Feinberg
The American Enterprise Institute (AEI) hosted a book presentation Feb. 12 for Fragile by Design: The political Origins of Banking Crises and Scarce Credit," by Charles Calomiris of Columbia Business School and Stephen Haber of Stanford.
Calomiris, banks, crisis, regulation
612
2014-05-19
Wednesday, 19 Feb 2014 07:05 AM
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