What I’m Reading

I finished Gregory Clark’s new book. I put it in the must-read category. I hope to publish a review on line in the next few months.

I am now reading Fragile by Design by Charles Calomiris and Stephen Haber. I posted a few months ago on an essay they wrote based on the book. I also attended yesterday an “econtalk live,” where Russ Roberts interviewed the authors in front of live audience for a forthcoming podcast. You might look forward to listening–the authors are very articulate and they speak colorfully, e.g. describing the United States as being “founded by troublemakers” who achieved independence through violence, as opposed to the more boring Canadians.

I think it is an outstanding book, although in my opinion it is marred by their focus on CRA lending as a cause of the recent financial crisis. This is a flaw because (a) they might be wrong and (b) even if they are right, they will turn off many potential readers who might otherwise find much to appreciate in the book. Everyone, regardless of ideology, should read the book. It offers a lot of food for thought.

I am only part-way through it. The story as far as I can tell is this:

1. There is a lot of overlap between government and banking. Governments, particularly as territories coalesced into nation states, needed to raise funds for speculative enterprises, such as wars and trading empires. Banks need to enforce contracts, e.g., by taking possession of collateral in the case of a defaulted loan. Government needs the banks, and the banks need government.

2. If the rulers are too powerful, they may not be able to credibly commit to leaving banks assets alone, so it may be hard for banks to form. But if the government is not powerful enough, it cannot credibly commit to enforcing debt contracts, so that it may be hard for banks to form.

3. Think of democracies as leaning either toward liberal or populist. By liberal, the authors mean Madisonian in design, to curb power in all forms. By populist, the authors mean responsive to the will of popular coalitions of what Madison called factions.

4. If you are lucky (as in Canada), your banking policies are grounded in a liberal version of democracy, meaning that the popular will is checked, and regulation serves to implement a stable banking system. If you are unlucky (as in the U.S.), your banking policies are grounded in the populist version of democracy. Banking policy reflects a combination of debtor-friendly interventionism and regulations that favor rent-seeking coalitions who shift burdens to taxpayers. The result is an unstable system.

I may not be stating point 4 in the most persuasive way. I am not yet persuaded by it. In fact, I think libertarians will be at least as troubled as progressives are by some of the theses that the authors promulgate.

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6 Responses to What I’m Reading

  1. peterdub says:

    The recommended self-censorship is part of the problem.

    • djf says:

      It’s sadly amusing that free-market/libertarian intellectuals like Arnold hold on to the hope that if they stifle any impulse to point out the downside of the Left’s various social policy fetishes (such as those advanced by the CRA), the Left will take them seriously, lay off the ad hominem invective, engage in dialogue and adopt some of their ideas, freeing the free marketeers from the necessity of forming a coalition with the disdained conservatives. Sorry Arnold, no matter how P.C. you free-market guys keep yourselves, it ain’t gonna happen.

  2. R Richard Schweitzer says:

    Would you accept that the differences in “Democracies” and “versions of Democracy” are actually variations in a process, which may include such variations as having or not having (or seeking) particular social objectives resulting from the process; variations in the conduct and participations in the process?

    Basically, isn’t “Democracy” a process – *not* a condition?

    • Matt Young says:

      Democracy is a stock and flow system that delivers information, mainly to the voter. Democracy is measured by the Austrian round aboutness measure.

  3. Lord says:

    Getting beyond the terminology, I would call liberal conservative and populist elitest, I wouldn’t call ours debtor friendly in any sense other than in providing pigs to be butchered while theirs is truly debtor friendly by preventing them from getting into much trouble in the first place, a far more nanny state than ours. Our financial elites need those pigs to slaughter, and while they know how to clothe their needs in rhetoric, it is still their needs being served.

  4. Matt Young says:

    Can giovernment systematically throw unexpected losses on the private sector? No, the money counters can count the ways to cheat better than the government can discover new ways to cheat. The best that a government can do is count down the economy to a low but stable level of efficiency. If the government goes beyond that point then Says law gets violated, mainly by citizen nullification, and the political system gets restructured.

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