Fragile by Design

I've recently finished reading Fragile by Design by Charles Calomiris and Stephen Haber. The basic premise of their book is that politics shapes banking systems and that banking systems become fragile because of politics. Using the political and banking histories of the UK, US, Canada, Mexico and Brazil, they argue that the well-being of banking systems depends upon the ability of political institutions to limit and balance the interests of coalitions groups whose bargaining power determines the shape and structure of the banking system. Calomiris and Haber argue that there is a 'Game of Bank Bargains', where the structure etc. of a banking system is a result of a bargaining game between politicians, taxpayers, depositors, businesses, bankers, bank shareholders, and debtors. 

This is a must-read book. Although I largely agree with their basic premise, I see things slightly differently. In my new book Banking in Crisis, I too argue that the fragility or otherwise of the UK banking system over the last two centuries was ultimately due to politics.  However, unlike Calomiris and Haber, I argue that government policy towards the banking system reflects the interests of the political and economic elite rather than being the result of a game of bargains. This economic and political elite can change over time. I also argue that banking policy may be derivative from other policies, with the result that the banking system can be fragile or stable by accident. My main issue with Fragile by Design is that the authors argue that democracy provides the best institutional setting for stable banking. However, the 2008 banking collapse, possibly the most severe banking crisis in history, mainly affected sophisticated democracies. In Banking in Crisis I argue that to achieve stable banking requires a fundamental change in how democracy operates, otherwise we are doomed to living with a more fragile banking system.




Popular Posts