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Fragile by Design: The Political Origins of Banking Crises and Scarce Credit

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Overview

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.

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Editorial Reviews

The New York Times Book Review - Liaquat Ahamed
…brilliant……The authors seem to have read everything on the subject, and their accounts, brimming with fascinating details and vignettes, are testament to their scholarship and breadth of knowledge…If your goal is to understand the origins of the recent financial crisis, Fragile by Design is probably not the book to read. But if you are looking for a rich history of banking over the last couple of centuries and the role played by politics in that evolution, there is no better study. It deserves to become a classic.
Publishers Weekly
12/23/2013
Business economists Calomiris and Haber (professors at Columbia Business School and Stanford University, respectively) explain how imperfectly politics and commercial banks intersect, and the consequences for the rest of us. Focusing on chronic instability in credit policies, they undertake a detailed comparative historical survey of five nations—England, the United States, Canada, Mexico, and Brazil. Instead of pointing the finger at "‘Wall Street fat cats'" or railing at political realities, they show how and why complex human interests inhibit achieving sound credit systems. Calomiris (U.S. Bank Deregulation in Historical Perspective) and Haber (The Politics of Property Rights) include a close look at the U.S. regulatory failure in the 2007–2009 subprime mortgage crisis. The goal of stable and abundant credit is elusive, the authors wisely conclude, since those who control policy fiercely guard their powers, the media rarely helps voters disentangle complex financial arguments, and elected politicians must cater to bankers, shareholders, depositors, debtors, and taxpayers. Their analysis suggests that autocracies do better with policy than democracies: Meiji-era Japan, Bismarck's Germany, Pinochet's Chile, and today's China, for example. This learned inquiry deserves ample attention from scholars, regulators, and bankers themselves. (Mar.)
From the Publisher
"Exploring the ways in which politics inevitably intrude into banking regulation, Calomiris and Haber clearly describe events leading to the recent financial crisis of 2007-2009. . . . This is an excellent work for understanding the role of credit and how the financial sector evolved in different settings."—Choice

"This is a beautifully-written book. Calomiris and Haber are always thoughtful, always clear, and they have an eye for the telling metaphor and the thought provoking fact. More importantly, the book reflects the authors' mastery of a vast amount of material on the history of banking. . . . Fragile by Design is a must-read for economic historians, a book to be put on the shelf with . . . similar classics."—Hugh Rockoff, EH.Net

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Product Details

Meet the Author

Charles W. Calomiris is the Henry Kaufman Professor of Financial Institutions at Columbia Business School and a professor at Columbia's School of International and Public Affairs. His many books include "U.S. Bank Deregulation in Historical Perspective". Stephen H. Haber is the A. A. and Jeanne Welch Milligan Professor in the School of Humanities and Sciences and the Peter and Helen Bing Senior Fellow at the Hoover Institution at Stanford University. His many books include "The Politics of Property Rights".

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Table of Contents

Preface ix
SECTION ONE No Banks without States, and No States without Banks
1 If Stable and Effi cient Banks Are Such a Good Idea, Why Are They So Rare? 3
2 The Game of Bank Bargains 27
3 Tools of Conquest and Survival: Why States Need Banks 60
4 Privileges with Burdens: War, Empire, and the Monopoly Structure of English Banking 84
5 Banks and Democracy: Britain in the Nineteenth and Twentieth Centuries 105
SECTION TWO The Cost of Banker-Populist Alliances: The United States versus Canada
6 Crippled by Populism: U.S. Banking from Colonial Times to 1990 153
7 The New U.S. Bank Bargain: Megabanks, Urban Activists, and the Erosion of Mortgage Standards 203
8 Leverage, Regulatory Failure, and the Subprime Crisis 256
9 Durable Partners: Politics and Banking in Canada 283
SECTION THREE Authoritarianism, Democratic Transitions, and the Game of Bank Bargains
10 Mexico: Chaos Makes Cronyism Look Good 331
11 When Autocracy Fails: Banking and Politics in Mexico since 1982 366
12 Infl ation Machines: Banking and State Finance in Imperial Brazil 390
13 The Democratic Consequences of Infl ation-Tax Banking in Brazil 415
SECTION FOUR Going beyond Structural Narratives
14 Traveling to Other Places: Is Our Sample Representative? 451
15 Reality Is a Plague on Many Houses 479
References 507
Index 549

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