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The recent financial crisis was an accident, a "perfect storm" fueled by an unforeseeable confluence of events that unfortunately combined to bring down the global financial systems. And policy makers? They did everything they could, given their limited authority. It was all a terrible, unavoidable accident. Or at least this is the story told and retold by a chorus of luminaries that includes Timothy Geithner, Henry Paulson, Robert Rubin, Ben Bernanke, and Alan
In Guardians of Finance, economists James Barth,
Gerard Caprio, and Ross Levine argue that the financial meltdown of 2007 to 2009 was no accident; it was negligent homicide. They show that senior regulatory officials around the world knew or should have known that their policies were destabilizing the global financial system, had years to process the evidence that risks were rising, had the authority to change their policies--and yet chose not to act until the crisis had fully emerged.
The current system, the authors write,
is simply not designed to make policy choices on behalf of the public. It is virtually impossible for the public and its elected officials to obtain informed and impartial assessment of financial regulation and to hold regulators accountable. Barth, Caprio, and Levine propose a reform to counter this systemic failure: the establishment of a "Sentinel" to provide an informed, expert,
and independent assessment of financial regulation. Its sole power would be to demand information and to evaluate it from the perspective of the public--rather than that of the financial industry,
the regulators, or politicians.
The MIT Press
"This is a timely, well-written, and nontechnical book by established experts in the field."--R.Grossman, Choice
The MIT Press
"For those involved in policy formulation and regulation, whether at national or international level, in government or financial institutions, this is compulsory reading." --
Richard Parlour, Central Banking Journal
The MIT Press
Posted March 26, 2012
James Barth, Gerard Caprio, and Ross Levine methodically debunk the myth that the ongoing financial crisis is an accident. The authors relentlessly bring to light the decisive role that defective regulatory and political systems played in undermining the global financial system during the ten years or so before the start of the current financial crisis. Messrs. Barth, Caprio, and Levine convincingly demonstrate in this process that financial innovation, regulatory gaps, and insufficient regulatory powers were not the key drivers behind this downfall. The financial regulators adopted detrimental policies to the long-term sustainability of the global financial system and persevered with these misguided policies even in the presence of growing evidence about their deleterious effect on financial stability. The authors clearly explain why the financial regulators too often espoused the interests of the finance industry at the expense of those of the public. Think for example about bias in favor of the financial services industry (home field advantage), fast revolving door between industry and regulators, lobbying, and simplistic ideologies. Messrs. Barth, Caprio, and Levine come to the conclusion that the public is still in no position to pressure financial regulators to act in their interest, regardless of the current reforms enacted to strengthen the global financial system. Think for example about the evolving policies that the U.S. financial regulators have pursued since the nineteenth century. The answers to recurring crises have been the addition of new rules, the establishment of more regulatory agencies, the hiring of more regulators, and the granting of ever greater discretionary power to the U.S. financial regulators over an even larger portion of the financial system. These reforms are fleeting palliatives that fail to address the systemic institutional defects that continue to afflict the U.S. regulatory apparatus. Messrs. Barth, Caprio, and Levine propose the creation of what they call the Sentinel to establish a better balance between the interests of the public and those of the financial services industry. The Sentinel has to have five traits in order to significantly increase the pressure on the financial regulators to act in the public interest: 1. Independence of short-run politics; 2. Independence of the financial services industry; 3. The power to demand and obtain information necessary for assessing and monitoring the financial regulators; 4. Multidisciplinary expertise necessary for beneficially processing that information; 5. Prominence to deliver such an assessment to the public and its elected representatives in an ongoing manner that materially affects the open discussion of financial sector policies. The authors do not think that existing U.S. institutions such as the Financial Stability Oversight Council (FSOC), the Office of Financial Research (OFR), and the Government Accountability Office (GAO) meet the five requirements mentioned above to qualify for the job description of the Sentinel. To their credit, Messrs. Barth, Caprio, and Levine acknowledge that the Sentinel is not a panacea. The Sentinel is a necessary component to boost governance and regulatory performance. In summary, the authors overwhelmingly demonstrate that the current financial crisis is far from being an accident.
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Posted April 6, 2013
This is a very informative and insightful book! In order to understand the financial crisis we need to understand how government regulations was also a culprit to the Great Recession. This book offer interesting insight to that aspect. The only drawback about this book is it should have been better edited. There are annoying misspellings such as " orange country" instead of Orange County. And "countryside" instead of Countrywide. Great read nevertheless !Was this review helpful? Yes NoThank you for your feedback. Report this reviewThank you, this review has been flagged.