Political Origin of Banking Crises and Scarce Credit
|April 14, 2014||Posted by Staff under Editorials|
This 2014 excerpt of the Financial Times, Mar 23, is a review by Martin Sandbu of Fragile by Design: The Political Origins of Banking Crises and Scarce Credit, by Charles Calomiris and Stephen Haber.
In Fragile by Design, Charles Calomiris and Stephen Haber, say that one reason conventional economists did not see the financial crisis coming is that their models are free of politics.
This sweeping account of how banking and politics have always been intertwined spans three centuries and five countries: the UK, the US, Canada, Mexico, and Brazil.
Governments typically need banks when they are running out of money (historically, usually when they were fighting wars) and are forced to bargain with private financiers. These financiers obtain concessions in return for funding a bank to channel credit to the government: in the last US bubble, they consisted of allowing megabank mergers. Banking develops as a rent-seeking racket where the politically powerful divide with bankers the spoils extracted from those outside of this political “coalition”.
The 1930s reforms in the US — the New Deal’s adoption of deposit insurance, mortgage guarantees, and the Glass-Steagall act that split commercial and investment banking — are usually taken to have transformed banking. Haber and Calomiris instead see continuity.
They argue that the old, inefficient system was stable only while low inflation prevailed. As price rises gathered speed from the late 1960s on, a legal ceiling on deposit rates encouraged savers to opt for money market funds, undermining the funding of depositary unit banks.
Ed. Notes: Economists shy away from politics because the powerful, who get their riches from ownership, can make life difficult for anyone who wants to study who does the work and who gets the rewards in a rigorous, scientific way. The whole raison d’etre of government throughout history has been to funnel wealth from workers to owners. Indeed, up until relatively recently, landowners were the government, and still are indirectly (more direct in England where they still have a House of [Land]Lords). The few researchers who did study ownership and receivership of rents objectively had no trouble at all predicting the last recession. Our own Fred Foldvary gave a reliable forecast in these pages and even before that he did an academic journal. England’s Harrison and Australia’s Anderson also went out on a limb and were far more accurate than ones who get all the press. If only the Financial Times would write about them!