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Guardians of Finance: Making Regulators Work for Us Hardcover – February 10, 2012
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This book will become a classic for those who want to learn what was behind the global financial crisis -- not just what went wrong, but why current reforms won't work. Most important, it offers guidelines to prevent the next crisis by forcing regulators, the Guardians of Finance, to work for the public interest rather than for narrow elites.(Nouriel Roubini, Co-Founder and Chairman, Roubini Global Economics)
This book involves a strongly, even passionately, argued attack on financial regulators for having made a mess of financial regulation, prior to 2007. It is beautifully written, and very well designed to achieve a wide audience of readers who are interested in the crisis, but are not necessarily themselves expert. It is based on great academic expertise, but wears its deep scholarship lightly, with no maths and no equations.(Charles Goodhart, London School of Economics)
There have been plenty of books on the financial crisis. But this one is different. While acknowledging that private financiers did plenty of damage, the authors shine the spotlight on regulators across the world. They argue that the crisis did not just happen to policymakers, it happened because of them, and offer careful and well-reasoned arguments to support their case. Guardians of Finance should be read by everyone interested in the future of free enterprise.(Raghuram G. Rajan, The University of Chicago Booth School of Business)
Financial crises are not in the interests of bankers, regulators, or politicians. Yet all three groups did nothing as the U.S. financial system headed over a cliff. Why didn't they act? Why did their counterparts in other countries, such as Ireland and Iceland, also stick their heads in the sand? Is there a way to prevent the next crisis, or do we have to rely on the same groups that brought us the ongoing disaster of 2007? Read this meticulously researched and clearly argued book, and learn the answers.(Stephen Haber, Stanford University)
This is a timely, well-written, and nontechnical book by established experts in the field.(R.Grossman, Choice)
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)
About the Author
James R. Barth is Lowder Eminent Scholar in Finance at Auburn University and Senior Finance Fellow at the Milken Institute.
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But finally, I consider this a very interesting book for everybody who wants a balanced analysis of how the supervisors let the financial system explode.
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.
As someone who knows a great deal about the causes and response to the financial crisis, I would say this book is for a more general audience rather than a technical audience. I would have liked a great deal more detail on some of the case studies. Many of these are addressed in a few pages and a more expansive analysis could easily have dedicated a chapter for each of the case studies. But again that would have likely not appealed to a more general audience.