The Bankers' New Clothes: What's Wrong with Banking and What to Do about It

The Bankers' New Clothes: What's Wrong with Banking and What to Do about It

The Bankers' New Clothes: What's Wrong with Banking and What to Do about It

The Bankers' New Clothes: What's Wrong with Banking and What to Do about It

Synopsis

What is wrong with today's banking system? The past few years have shown that risks in banking can impose significant costs on the economy. Many claim, however, that a safer banking system would require sacrificing lending and economic growth. The Bankers' New Clothes examines this claim and the narratives used by bankers, politicians, and regulators to rationalize the lack of reform, exposing them as invalid.

Admati and Hellwig argue we can have a safer and healthier banking system without sacrificing any of the benefits of the system, and at essentially no cost to society. They show that banks are as fragile as they are not because they must be, but because they want to be--and they get away with it. Whereas this situation benefits bankers, it distorts the economy and exposes the public to unnecessary risks. Weak regulation and ineffective enforcement allowed the buildup of risks that ushered in the financial crisis of 2007-2009. Much can be done to create a better system and prevent crises. Yet the lessons from the crisis have not been learned.

Admati and Hellwig seek to engage the broader public in the debate by cutting through the jargon of banking, clearing the fog of confusion, and presenting the issues in simple and accessible terms. The Bankers' New Clothes calls for ambitious reform and outlines specific and highly beneficial steps that can be taken immediately.

Excerpt

The fifth anniversary of the Lehman Brothers bankruptcy led many to ask whether the financial system is safe today. The answer to this question is no. The key factors that caused the subprime mortgage crisis to upset the global economy are still in place. Politicians and regulators have allowed effective reform to be stalled.

Bankers and their supporters often threaten that proposed regulation will “harm credit and economic growth.” Such threats scare policymakers. Yet the explanations given for the claims, if any, are nonsensical or misleading. Actually, the sharpest downturn in lending and growth since the Great Depression occurred in the fall of 2008. This downturn was not due to regulation, but to the reckless practices and excessive fragility of banks and the financial system. The suggestion that making banks safer would be harmful for us all is simply false.

Much is wrong with banking and much can be done to make it better. Bankers may benefit from the dangerous system we have, but most others are harmed. The system is fraught with inefficiencies that harm the economy every day. Even now, the continued weakness and flawed incentives of banks dampen new lending that would help economic recovery. Financial crises, and the damage they bring to the economy, are just the most visible harm created by this unhealthy system. Yet, confusion and politics have prevented beneficial reform.

Refuting the claims made by bankers and others is not difficult. However, many people either don’t understand or believe that they don’t understand . . .

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