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

By Anat Admati; Martin Hellwig | Go to book overview

PREFACE TO THE PAPERBACK EDITION

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

-ix-

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

Table of contents

  • Title Page iii
  • Contents vii
  • Preface to the Paperback Edition ix
  • Preface xiii
  • Acknowledgments xvii
  • One - The Emperors of Banking Have No Clothes 1
  • Part One - Borrowing, Banking, and Risk 15
  • Two - How Borrowing Magnifies Risk 17
  • Three - The Dark Side of Borrowing 32
  • Four - Is It Really "A Wonderful Life"? 46
  • Five - Banking Dominos 60
  • Part Two - The Case for More Bank Equity 79
  • Six - What Can Be Done? 81
  • Seven - Is Equity Expensive? 100
  • Eight - Paid to Gamble 115
  • Nine - Sweet Subsidies 129
  • Ten - Must Banks Borrow So Much? 148
  • Part Three - Moving Forward 167
  • Eleven - If Not Now, When? 169
  • Twelve - The Politics of Banking 192
  • Thirteen - Other People’s Money 208
  • Notes 229
  • References 337
  • Index 363
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