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

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Overview

"A seminal political economy analysis of why banking varies so much across countries, with such profound consequences for economic development and social welfare. Not just fascinating and original, but also right."--James Robinson, author of Why Nations Fail

"A monumental intellectual and scholarly achievement that will shape thinking on finance and politics for decades to come. A book for the ages, whose insights are delivered in a lively, punchy, and nontechnical narrative."--Ross Levine, University of California, Berkeley

"A major contribution to our understanding of banking, showing why nations need banks, why banks need the state, and how the quality of banking depends on how the 'Game of Bank Bargains' is played between politicians, bankers, and a penumbra of key protagonists."--Charles Goodhart, London School of Economics and Political Science

"What explains the dramatic variation across countries in the extent, structure, regulation, and fragility of banking? Calomiris and Haber provide a tour de force resolution of the question. Their answer: politics. Fragile by Design's synthesis is shockingly original and convincing."--Darrell Duffie, Stanford University

"A remarkably detailed account of the sources of banking and financial failure under different institutional rules. A masterful achievement and a must-read for banking scholars, analysts, and regulators."--Allan Meltzer, author of A History of the Federal Reserve

"Fragile by Design bristles with insights about how conflicting private interests, intermediated through political institutions, have sometimes produced banking and social insurance arrangements that make financial crises much more likely than they should be."--Thomas Sargent, Nobel Laureate in Economics

"Why do America's banks go bust so often? Fragile by Design draws back the veil that hides the murky world where politics and big money meet, and exposes the surprising truth--that the banks were built to fail. Read, learn, and keep your cash close at hand!"--Ian Morris, author of Why the West Rules--for Now

"Fragile by Design explains why the U.S. banking crisis of 2007-2009 is no aberration, but only the latest episode of a populist bargain gone awry. This is a powerful entry in the debate on how to fix the postcrisis world."--Raghuram Rajan, author of Fault Lines

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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

Longlisted for the FT & McKinsey Business Book of the Year 2014

"Brilliant. . . . [I]f 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."--Liaquat Ahamed, New York Times Book Review

"Business economists Calomiris and Haber explain how imperfectly politics and commercial banks intersect, and the consequences for the rest of us. . . . This learned inquiry deserves ample attention from scholars, regulators, and bankers themselves."--Publishers Weekly

"Calomiris and Haber offer a thoughtful counter-argument to the current received wisdom."--Howard Davies, Times Higher Education

"Readable, erudite, myth-busting. . . . The authors' clear and well-documented discussion of what happened should dissuade anyone of the myth that the economic crisis of 2007-09 was caused by the profit-and-loss system of unfettered capitalism."--Gene Epstein, Barron's

"Charles Calomiris and Stephen Haber make the compelling argument that a country's propensity for frequent banking crises is linked to the ability of populist elements to hold the banking sector to ransom."--Louise Bennetts, American Banker

"This is a great history of political interference in bank regulation . . ."--James Ferguson, Money Week

"One reason why economists did not see the financial crisis coming is that the models most macro and financial economists deal in are free of politics. Fragile by Design offers a much-needed supplement."--Martin Sandbu, Financial Times

"Will a next crisis be averted? Perhaps, if our regulators read this book."--Vicky Pryce, The Independent

"Fragile by Design . . . is a great book. . . . [E]normously illuminating, and contains the most powerful and concise account of the causes of the 2008 crisis that I have seen."--Eric Posner, EricPosner.com

"If you have time to read only one book about the causes of the 2008 financial collapse, read this one. . . . Charles W. Calomiris and Stephen H. Haber . . . have written an exhaustively researched and readable volume. . . . With great literary sensibility uncommon to economists, Calomiris and Haber have performed a public service by painstakingly identifying these root causes."--Diana Furchtgott-Roth, National Review

"Capital markets, regulatory institutions and the behaviour of people employed in the financial sector are neither predetermined nor universal, but rather the product of culture, history, and the political system. That is a perspective developed effectively by Profs Calomiris and Haber."--John Kay, Financial Times

"[T]he methodology is universally applicable and obviously raises questions about the nature of these arrangements in a country like France. . . . [T]his work allows us to understand better why . . . the alleged remedies and reforms, from 'unconventional measures' major central banks to new regulatory structures, no way affect the old paradigms and therefore merely prepare the next crises."--Phillipe Ries, Mediapart

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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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