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on February 23, 2015
Fragile by Design takes a fresh approach to looking at banking systems and frequency of crisis through a game theoretic lens. It is a fresh viewpoint on thinking about banking systems and their stability and the relationship between banking and the state. The authors focus on the UK, the US and Canada as well as Mexico and Brazil. They discuss the history of the state and banking in each of these countries to give the reader a framework with which to think about the game theory embedded in the risks of setting up banks, distribution of banks and allocation of credit, and the distribution of returns to the various stakeholders.

Fragile by Design is split into 4 sections. The first is titled No Banks without States and No States without Banks. It lays the foundation of why modern societies need banks and how banking systems first evolved to support fiscal spending. The describe in straightforward terms how there is a mutual dependence between the state and the financial system and especially in the mercantilist economic era that ability to fund wars was a matter of survival for the sovereign. The need of wealthy elites to be confident that their wealth would not be expropriated through the financial system created a bargain between the state and banking principals about how to allocate a country's savings between the constituents (often unrepresented for that matter). The authors give the history of the Bank of England and how it was created to support the funding of wars with France. The authors also detail how the need for greater inclusiveness for the population within the political sphere led to a slow moving change of the Bank of England's mandate from supporting the state and being the sole allocator of credit to being the discounter of bank bills and thus the effective banker's bank. The authors detail how the changing political economy and bank bargain between the banks, state and Bank of England led to a more fragile banking system than in Scotland in which banks competed on a more equal plane with one another. The authors in the first section familiarize the reader with the language of bank bargaining as well as provide an illuminating history of the coevolution of banking and the state.

The authors then move on to the main section of the book The cost of Banker-Populist Alliances. Through their framework the authors give the reader a sense of how the US banking system has been more fragile through its history due to particular bargains (based on early agrarian ideology) that led to a fragmented banking system up until the 90s. The authors discuss US history and the battles of the early US politicians over the relevance of a central bank. The authors discuss how banking in the US was not federally regulated and was decided by State legislatures which as a function of trying to keep consistent credit allocation harvested unit banks (banks of one branch). The authors detail how the banking system poorly allocated credit through the system or effectively forced credit to be local and had no economies of scale. This bargain led to a higher frequency of banking panics through time. The federal reserve system was an attempt to help by instituting regional central banks which coordinated but the authors note that they did not always agree like today and that the system back then still had no cross state banks. The authors discuss how deposit insurance was another bank bargain that created potentially more fragility as it changed the incentives of bank operators. The authors also Canada and how it has had no banking crises in its history. The authors discuss its different history in which British rule coupled with French population dominance led to stronger central government that changed the bank bargaining game and led to a more oligopolistic banking system that was prevented from extracting rents by rolling bank charters which could be led to expiry if banks behaved poorly.

The third section is titled Authoritarianism, Democratic Transitions and the Game of Bank Bargains. To a certain extent this section gives the best understanding of how changing institutional arrangement changes the way banks function. The authors begin the book with the idea that banks don't exist in lawlessness as the risk of appropriation is too great. The authors in the third section go into case examples of fairly lawless states and how their internal changes have led to banking reform. The authors focus on Mexico and Brazil. They start with Mexico and give its history and describe how the first stable banks were formed during "Pax Porfiriana" when there was a stable coalition of politicians and financiers that was able to form. Prior to this the state was run by warlords who would appropriate banks capital at will and as such were effectively non-existent. The increase of credit in the economy was measured during this period to show how banking intensity increased. The reader is given a taste of how banking credit was typically allocated to all the business ventures of the bank principals rather than broadly through society. The authors then discuss how the PRI took over in the 20th century and ruled up until the banking crisis in the early 90s. They discussed the cronyism in the privatization of the banks in which the bidders funded their purchases with loans from the banks being purchased. The authors discuss how the banks ended up becoming reformed through foreign acquisition in which lending became merit based and now most of the Mexican banking system is dominated by foreign banks. The authors also discuss Brazil and its history. They discuss the role of the slave trade on the distribution of wealth and how such a distribution led to the bargain between the elites and the Portuguese Royalty. The authors discuss how the coalition of rulers and elites used inflation to extract gains out of the more poor laboring society and how such a phenomenon led to persistent high inflation that finally let do political change.

Fragile By Design provides a new way of looking at the financial crisis as well as a new way of looking at the structure of economies as a consequence of the Game of Bank Bargains. The authors recognize that giving their narrative doesn't give an algorithm for discussing probabilities of bank failures and discuss some econometric results that give substance to their suspicions. They also highlight that their framework allows a new perspective on thinking about bank crisis as a consequence of variable interdependence rather than as a statistical exercise. There is much that is controversial and I'm sure many would immediately dismiss the authors views that the housing crisis was a function of a political bargain with the banks about lax capital requirements to fund risky loans to ameliorate rising inequality, but their arguments are coherent and there is much evidence to support their perspectives. The authors also briefly discuss China, Japan, Germany, Chile as potential counterexamples and handle them well. This is a fresh perspective on financial crisis as propogated through the banking channel and their framework is a valuable one to consider when analyzing the relationship between banking and the state.
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on October 16, 2016
The authors are thorough in their detail of the Game of Bank Bargains, or the bargains that banks and governments make to support each others' goals. Political coalitions, sometimes among groups that would not ordinarily agree, shape the activities of banks.
The authors compare the banking histories of several different countries to illustrate that the peculiarities of local politics determines the availability of credit, which influences economic growth.
Instead of superficial treatments with the theme of 'bankers are baddies' popular (portrayed in movies and novels) in the wake of the 2008 crisis, read this to get an in-depth analysis.
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on October 9, 2014
I have read many books about the 2008 banking crisis. This book does not limit itself to that subject. However, it helped me understand that both parties and the fed have blood on their hands. The bank bailout, excessive money printing, etc stem from short term political bargains that have contributed to dangerous misallocation of capital. The gas can has been kicked down the road and will likely result in a bigger mess to clean up.
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on August 21, 2014
Fascinating read, and my recommended antidote for the superficial bickering that passes for policy discussion in the media. If you want to see through the polemical fog that surrounds the 2008 banking crisis, banking regulation and Wall St vs Main St, this would be the book to read. His focus on the coalitions behind various regimes (England, Scotland, US,Mexico, Canada, Brazil) would no doubt illuminate other sectors as well.
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on July 26, 2014
Bogged down in British banking history, but right on in the critique of the history of U. S. banking problems. The authors point out the political influences that have contributed to the securitization of mortgages and the role that Fanny and Freddie have played as well as the role that the Community Reinvestment Act of 1977 had to do with undermining bank underwriting standards.

The authors claim that the FDIC is funded by taxpayers. Not so. The FDIC is funded by a tax on the deposits of the member banks.
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on May 10, 2017
A lot of in depth description of how political systems relate to banking systems. Very readable and accessible. I mainly read it in waiting rooms, but it is very informative.
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on July 27, 2014
This well-crafted trip through international banking history is written basically from a banker-businessperson's perspective. It is sober in tone, clear, not acerbic, and well illustrates the pulls and tugs between politics and banking, and how various stories play out. Quite a bit of time is spent on the USA and the coalition starting around the 1990s between big banks looking for Congressional approval for expansion, and urban groups looking for credit extension to formerly excluded groups. The rest, as we have all experienced, is history. But all kinds of schemes and bedfellows in many countries are detailed. I would see this as counterbalancing another slightly more center-leftish book such as All the Presidents' Bankers by Nomi Prins (which I enjoyed and benefitted from).
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on August 10, 2015
Fantastic book on the history of banks and methods of banking, and why. This goes thru Europe, england, as well as the U.S. Very well written but not technical with academic points. Banks are a major issue in the economy, this has clarified a lot of facts for me. This nation's banking system has been used by politicians to their own ends. This book does not focus on politics so much, but does on how banks work. I recommended this to everyone.
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on June 22, 2014
1...All governments operate in deficit...therefore have debt.

2...Banks-to-Big-to-Fail are required..to sell this/their government's debt.

3...Congress moust pass laws vto ll protect
debt/bonds...or the governments fail.

3...Congress must pass laws to protect the BigBondSellingBanks from failing...or the government
cannot continue to operate by deficit.
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on August 29, 2014
We recently read, appreciated, and enjoyed the analysis in Fragile by Design – The Political Origins of Banking Crises and Scarce Credit (Princeton University Press, 2014). Calomiris and Haber analyze banking structure and operations over the past centuries and across varying countries and types of government. These authors argue that “political bargains” in all cases determine banking structure and operations. The bargains differ substantially depending on whether the form of government is authoritarian or democratic. Within democratic societies, the degree of populism (majority rule) versus liberalism (protection of individual, corporate, and property rights from majority rule) also plays a large role in the bargain that underlies the banking system.

In the landscape of Calomiris and Haber, governments need banks as agents for state borrowing. Thus, governments charter banks to enable and expand such borrowing and also to accomplish political tasks of providing loans to favored sectors and individuals. In return, governments confer limited “charters” such that banks with charters have reduced competition and therefore enjoy higher returns than they would receive in an open market. Direct and indirect government support activities, including deposit insurance, lending, and bailouts, are just additional features of the “bargain.”

Fragile by Design profiles the histories of banking in the United Kingdom, Canada, the United States, Mexico, and Brazil. The authors’ theory explains, for example, why “the United States has had 12 major banking crises [since 1840] while Canada has had none.” More specifically, the “political bargain” among government, banks, and regulators in the U.S. prohibited or strongly discouraged branch banking until 1980! Unlike the Canadian banks with sizable branch networks, stand-alone (“unit”) banks have no risk diversification. Calomiris and Haber describe the creation of deposit insurance by Federal legislation in 1933 as a government prop to unit banks. Deposit insurance schemes at the state level had already failed by that point due to moral hazard and excessive taxpayer losses.

Calomiris and Haber argue that, since 1980, the political bargain detrimental to safety and soundness of U.S. banks is the government “encouragement” of residential mortgage lending. Rather than wade through this contentious question of recent history here, we note that Morgenson and Rosner’s Reckless Endangerment (Times Books, 2011) shares the Calomiris-Haber view. In the (majority) Financial Crisis Inquiry Report of 2011, however, the government commission disagrees that either government housing policy or the government-sponsored enterprises contributed significantly to the degradation of mortgage underwriting standards.

Excellent book for those already interested in banking and history.
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