Thursday, April 2, 2015

My Amazon Review of Charles Calomiris' and Stephen Haber's "Fragile by Design: The Political Origins of Banking Crises and Scarce Credit"

Banking in a Political Context

According to Professors Calomoris and Haber banking does not exist in a political vacuum. In fact banks are product of a bargain between political coalitions and bankers; a social contract, if you will. In a very long book, too long in my opinion, the authors delve into the history of the banking systems of the United States, the United Kingdom, Canada, Brazil and Mexico and the political coalitions that underpin them.

Calomoris is a self-described Hamiltonian; he likes large banks with extensive branching systems. He credits Canada where a bank bargain between the political elites enabled a crisis free banking system. In contrast the United States with its agrarian populist combining with local banks created a crisis ridden small unit banking system. That system ended when a new coalition of mega-banks and urban activists enabled the creation of the banking system we have today. Simply put in exchange for supporting mega-mergers, banks channeled trillions of dollars into urban mortgages, some of which being of dubious quality. One thing that comes through is that lending on illiquid real estate lurks behind most of the banking crises experienced in the U.S. and U.K.

The political context rests on the fact that politicians need banks to fund government debt, support favored activities and to make it easy to finance government though an inflation tax. Brazil and Mexico are prime examples of using inflation to fund the government. In the United States banks and government sponsored agencies exist to fund housing programs off the budget.

This is more a history book than an economics book. Nevertheless it is very important for economists to understand the milieu their models are operating in.

The full Amazon URL is:

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