The Elephant Is Still In The Room

The wound of the financial crisis of 2008, and the challenge to the legitimacy of our governance, is still very much with us.

Despite the frequent claims of policy officials who presided over the bailouts and regulators, it would be impossible to say that the public demoralization has been rectified and that that a balanced social contract between society and the large complex financial institutions has been achieved. As Andy Haldane wrote in 2009, financial Institutions continue banking on the state and the legitimacy of governance continues to be doubted. 

Institute for New Economic Thinking scholars Ed Kane and Anat Admati were in Washington today to testify before the Senate Banking Committee on the new General Accounting Office report entitled “ Large Bank Holding Companies: Expectations of Government Support.”

Prof. Kane, drawing on work he co-authored under an Institute research grant was very critical of the GAO report for understating the true scale of the taxpayer subsidy to “too big to fail” financial institutions.  His analysis of how taxpayers are abused and how the regulatory apparatus and the legal system fail to represent their stake is very insightful.

READ ED KANE’S TESTIMONY HERE

Prof. Admati testified about how the conventional wisdom of the economics of banking, banking regulation, and the subsidies provided to “too big to fail” institutions are the product of flawed economic ideas dominated by the beliefs of bankers. 

READ ANAT ADMATI’S TESTIMONY HERE

At the Institute, we feel that this is a debate that cannot be swept under the rug. It is an open wound weighing on our political economy. Martin Wolf of the Financial Times, in reviewing the book by Prof, Admati and Martin Hellwig called “The Bankers New Clothes” states:

“Allowing such important businesses to operate with almost no equity cushions encourages dangerous conduct. Banks are not special, except for what they are allowed to get away with. The problem is bigger than that banks are ‘too big’ or ‘too interconnected’ to fail. It is that they are so complex and so grossly undercapitalised. The model is intellectually bankrupt. The reason that this is not more widely accepted is that bankers are so influential and the economics are so widely misunderstood. Read this book. You will then understand the economics. Once you have done so, you will also appreciate that we have failed to remove the causes of the crisis. Further such crises will come.”

Here’s to these two fine scholars for entering the fray to examine, unmask, and repair the causes of that dreadful crisis.  They are vital contributors to the critical discourse on this ever so important and obfuscated issue.