“Fragile by design” – the political causes of banking crisis

Charles Calomiris undoubtedly is one of the leading experts on banking crisis in the world. Calomiris has a new book coming out – co-authored with Stephen Haber. The main thesis in the book – “Fragile by Design: Banking Crises, Scarce Credit,and Political Bargains” – is that banking crisis is not an inherent characteristic of a free-market financial system, but rather the outcome of what Calomiris and Haber terms the “Game of Bank Bargains” between the government and special interests and how this game lead to different incentives for excessive risk taking or not.

For natural reasons I have not read the book yet, but in a couple of recent papers and presentations by Calomiris and Haber have spelled out the main ideas of the book (See for example here, here, here and here). I find their large survey of history of banking crisis tremendously interesting and I find it particularly interesting that Calomiris and Haber conclude that the root cause of banking crisis has to be found in what political institutions different countries have. Said in another way the main cause banking crisis is one of “political design”.

One of the main views of Calomiris and Haber is that some countries are a lot more prone to banking crisis than other. Calomiris and Haber list the following countries as particularly prone to banking crisis: Argentina, the Democratic Republic of the Congo, Chad, the Central African Republic, Cameroon, Guinea, Kenya, the Philippines, Nicaragua, Brazil, Bolivia, Costa Rica, Thailand, Mexico, Ecuador, Colombia, Uruguay, Chile, Turkey, Spain, Sweden and the United States.

Similarly Calomiris and Haber list a number of countries that in general have been crisis free (despite abundant credit):  Bahamas, Malta, Cyprus, Brunei, Singapore, Hong Kong, Macao, South Africa, Italy, Austria, New Zealand, Australia, and Canada.

The differences between USA and Canada seem to be particularly interesting (discussed in Chapter six of the book). Hence, since 1840 the US have had 14 banking crisis, while Canada have had none and this despite of the fact that credit have been as abundant in Canada as in the US. While the two countries have the a very similar cultural and colonial  history the political institutions in Canada and the USA are very different. These differences in political institutions according to Calomiris and the US have lead to the development of vastly different banking systems in the two countries – “branch banking” in Canada and “unit banking” in the US.

There are a lot more in the book than what I have discussed above and the papers that Haber and Calomiris already have put out are extremely interesting and insightful so I can’t wait to read the book! The book unfortunately is not available on Amazon yet so I haven’t ordered it yet, but I hope that that will soon change.

PS If there is one thing that seems to be missing in Calomiris and Haber’s discussion of the causes of banking crisis then it is a discussion of monetary policy regimes. That is unfortunate in my opinion as there is no doubt that monetary policy failure has played a huge role in the present crisis and in historical crises – something I know at least Calomiris acknowledges.

Update: Charles Calomiris has informed me that “Fragile by Design” also include a discussion of monetary policy regime – for example in the case of Brazil.

Update 2: Here is an recent interview with Charles on Bloomberg TV.

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9 Comments

  1. It seems a really interesting book, but maybe we will better discuss after having read it, why Italy is on the second group.
    Thanks for the advise!

    Reply
    • lateralsulcus, yes maybe we should wait, but the papers already published by Calomiris and Haber give a pretty good idea about the conclusions of the book.

      So far as I know they do not look at the specific for Italy, but that might be worth a closer look.

      Reply
  2. I read sth about the book a few weeks ago, it seems really interesting. People just fail to grasp how much are these thing importand in the banking setup we have today!

    Reply
  3. Tommy Dorsett

     /  April 20, 2013

    My problem with Calomiris is his refusal to see monetary policy at the root of many of these crises – the eurozone being case and point. Mayby you can convince him to broaden and sharpen his scope.

    Reply
    • Tommy, I fully agree. That said, Calomiris clearly has a monetarist perspective on the Great Depression, but unfortunately he has not yet been convinced that there is a monetarist explanations of the Great Recession.

      Reply
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