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Selgin on Haber and Calomiris

There is no doubt that I very much like Stephen Haber and Charles Calomiris’ great book “Fragile by Design” on the constitutional origin of banking crisis (take a look at my earlier posts on the book here and here)

I do, however, not agree with everything in the book and now George Selgin has a review of “Fragile by Design” that addresses some of these issues. It is a great review. The read the read book and read the review.

Here is the abstract from George’s review:

 In Fragile by Design (2014), Charles Calomiris and Stephen Haber argue that banking crises, instead of being traceable to inherent weaknesses of fractional-reserve banking, have their roots in politically-motivated government interference with banking systems that might otherwise be robust. The evidence they offer in defense of their thesis, and their manner of presenting it, are compelling. Yet their otherwise persuasive work is not without significant shortcomings. These shortcomings consist of (1) a misleading account of governments’ necessary and desirable role in banking; (2) a tendency to overlook the adverse historical consequences of government interference with banks’ ability to issue paper currency; (3) an unsuccessful (because overly deterministic) attempt to draw general conclusions concerning the bearing of different political arrangements on banking structure; and (4) an almost complete neglect the of role of ideas, and of economists’ ideas especially, in shaping banking systems, both for good and for evil. The last two shortcomings are especially unfortunate, because they suffuse Fragile by Design with a fatalism that is likely to limit its effectiveness in sponsoring needed change.

PS my recent presentation of monetary and currency reform in Iceland was very much in the spirit of Fragile by Design.

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Book of the day – “Fragile by Design”

I have waited for this book for a while, but yesterday it finally arrived in the mail. It is Fragile by Design by Charles Calomiris and Stephen Haber.

I have only read a couple of pages, but so far it is very good. Extremely well-written. I look forward to reading the rest of the book soon. Fragile by Design

This is the book description:

Why are banking systems unstable in so many countries–but not in others? The United States has had twelve systemic banking crises since 1840, while Canada has had none. The banking systems of Mexico and Brazil have not only been crisis prone but have provided miniscule amounts of credit to business enterprises and households. Analyzing the political and banking history of the United Kingdom, the United States, Canada, Mexico, and Brazil through several centuries, Fragile by Design demonstrates that chronic banking crises and scarce credit are not accidents due to unforeseen circumstances. Rather, these fluctuations result from the complex bargains made between politicians, bankers, bank shareholders, depositors, debtors, and taxpayers. The well-being of banking systems depends on the abilities of political institutions to balance and limit how coalitions of these various groups influence government regulations.

Fragile by Design is a revealing exploration of the ways that politics inevitably intrudes into bank regulation. Charles Calomiris and Stephen Haber combine political history and economics to examine how coalitions of politicians, bankers, and other interest groups form, why some endure while others are undermined, and how they generate policies that determine who gets to be a banker, who has access to credit, and who pays for bank bailouts and rescues.

Recenly Charles and Stephen talked to the legendary EconTalk host Russ Roberts about their new book. Listen to the interview here.

I do not agree with everything Charles and Stephen are saying, but I fully agree with the general idea that we cannot understand banking crisis without understanding the politics of banking – or what they call The Game of Bank Bargains.

Anyway, since I have only read a small part of the book this is not a review and I am sure I will return to comment more on the ideas in the book.

I have written about the book before – see here and here.

PS Of course I would stress the role of monetary policy in banking crisis. That is another issue…

I just ordered “Fragile by Design”

I must admit that I am a bit of a “serial shopper” when it comes to buying books on Amazon. Today I (pre) ordered a book I have been waiting for some time –  “Fragile by Design: Banking Crises, Scarce Credit,and Political Bargains”  by Charles Calomiris and  Stephen Haber. I have written about the book before:

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 hereherehere andhere). 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!

“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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