Why Our Banking System is Broken–and the Reforms Needed to Fix It

j9929[1]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. Anat Admati and Martin 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.

Learn more about it from Anat Admati’s interview from NPR’s Morning Edition:
http://n.pr/YwxWQK
Anat Admati argues that banks carry too much debt and have too little equity.

We invite you to read a book excerpt at npr.org at:
http://n.pr/16xGA8Q

The Bankers’ New Clothes:
What’s Wrong with Banking and What to Do about It
by Anat Admati & Martin Hellwig

“Crucial . . .”–Jim Surowiecki, NewYorker.com

“Ms. Admati and Mr. Hellwig, top-notch academic financial economists, do understand the complexities of banking, and they helpfully slice through the bankers’ self-serving nonsense. Demolishing these fallacies is the central point of The Bankers’ New Clothes.”–John Cochrane, Wall Street Journal

We also invite you to try your luck and enter for a chance to win a copy of The Bankers’ New Clothes: What’s Wrong with Banking & What to Do about It at Goodreads:
http://bit.ly/ZNAI66

Affluence and Influence Create Supercitizens

According to Martin Gilens in his book Affluence and Influence: Economic Inequality and Political Power in America, with great wealth comes great influence on the policies that are enacted in this country. While many believe that though there is economic difference in society there is still political equality, Gilens shows that an individual’s amount of affluence mirrors their level influence on policies. In a recent article by Chrystia Freeland for New York Times, the affluent are described as “supercitizens” because of their more extensive influence when it comes to policy changes. Freeland explains why this is the case in the article.

When Supercitizens Pull Up the Opportunity Ladder

MIAMI — Louis D. Brandeis, the American jurist, famously warned: “We may have democracy, or we may have wealth concentrated in the hands of a few, but we can’t have both.”

randeis’s cri de coeur was inspired by an indignant observation of the shenanigans of America’s robber barons during the Gilded Age. Today, we live in a data-driven age, and some careful students of the connection between money and politics have now amassed a powerful body of evidence to support Brandeis’s moral claim. A lot of it is assembled in a report by the progressive research organization Demos, published this week.

One of the most striking findings is the extent to which economic power translates into political power.

Institutionally, this is an era of unprecedented democracy — one of the triumphs of the 20th century has been the extension of voting rights to all adults in a lot of the world.

But even in the United States, the country that thinks of itself as being the world’s leading democracy, it turns out that those rights do not translate into much actual political power. David Callahan, co-author of “Stacked Deck,” the Demos report, describes the superrich as “supercitizens, with an outsized footprint in the public square.”

“I think most Americans believe in the idea of political equality,” Dr. Callahan told me. “That idea is obviously corrupted when in 2012, one guy, Sheldon Adelson, can make more political donations than the residents of 12 states put together.”

The Demos study draws in part on the quantitative research of Martin Gilens, a professor of politics at Princeton University, in New Jersey, and author of “Affluence and Influence: Economic Inequality and Political Power in America.” Dr. Gilens, who focused on the divide between the top 10 percent and everyone else, found a high degree of what he calls political inequality.

Read the FULL article here.

[Read more...]

The Great Rebalancing Review in The Wall Street Journal

The Wall Street Journal published a book review of The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy by Michael Pettis. The reviewer calls Pettis a “brilliant economic thinker” and gives a good background of the financial situation in China and why it needs to be rebalanced. If you are not quite sure what the book is about or what exactly is going on with the Chinese economy and why it is important at all, this book review is a great place to start.

A Banking Paper Tiger

China Development Bank underwrote a massive stadium in Loudi, Hunan Province—a city that lacks a professional sports team.

China’s econoPettis_GreatRebalancing_S13my sometimes seems the work of miracles: three decades of economic growth, with GDP compounding at an annual rate of around 10%; the world’s highest levels of savings and investment; vast trade surpluses, which feed the largest foreign-exchange reserves in history. The financial system has played a key role in delivering these economic feats, and no single institution within it has been more important than China Development Bank. “Understand CDB,” Henry Sanderson and Michael Forsythe write in “China’s Superbank,” “and you understand the core of China’s state capitalism.”

This so-called policy bank, founded less than two decades ago, boasts a larger loan book than J.P. Morgan ChaseJPM +3.41% . Over the past 15 years, CDB has lent trillions of dollars to finance China’s urbanization policy. More recently, it has dished out vast sums across the globe to secure China’s long-term energy supplies. Hugo Chávez, whose country has been the largest single foreign recipient of CDB’s loans, proclaims his financial benefactor as the bank “with the most money in the world.”

Read the FULL review at The Wall Street Journal online.

Applying Game Theory to Watching the Oscars

k9998Why do Internet, financial service, and beer commercials dominate Super Bowl advertising? How do political ceremonies establish authority? Why does repetition characterize anthems and ritual speech? Why were circular forms favored for public festivals during the French Revolution? Michael Suk-Young Chwe’s Rational Ritual: Culture, Coordination, and Common Knowledge tackles these questions using a single concept: common knowledge. A recent New Yorker article, Is It Rational to Watch the Oscars? uses Chwe’s ideas about rational ritual to explore the question posed in the article’s title:

Events like the Oscars and the Super Bowl generate what game theorists call “common knowledge,” which itself has value. In the case of the annual Hollywood shindig, this knowledge isn’t confined to an awareness of which films win or lose. If that was what people really cared about, they could simply look at the list of winners online, or in the morning newspaper. (In the old days, that’s what most did, and it’s hard to argue that their welfare suffered.) The common knowledge includes all the other goofy stuff that happens at the Dolby Theatre: the wardrobe disasters; the unfunny jokes; the weird dance routines; the embarrassing acceptance speeches; the unexpected appearance of Michelle Obama on a large screen above Jack Nicholson’s head. (Yes, I ended up watching the last forty-five minutes.) …

Read the full article, here.

 

Admati on CBSNews.com’s Moneywatch

Anat Admati appeared on CBSNews.com’s Moneywatch to discuss the problems with the banking system and possible solutions to remedy the problems. Admati is co-author of The Bankers’ New Clothes, a forthcoming book that not only critiques big banks but also gives them advice to fix their mistakes before it is too late.

Also, read the accompanying article on CBSNews.com.

Admati on Fox Business Network

Anat Admati appeared on Fox Business Network’s Money with Melissa Francis on Tuesday to discuss the government’s regulations for the financial sector. Admati is co-author of The Bankers’ New Clothes: What’s Wrong with Banking and What to Do About It which examines the current banking system problems and how to fix them in clearly defined terms.

Watch the full interview here.

Additionally The New Yorker, Bloomberg Business Week, and Business Insider all discuss the financial situation and possible solutions as laid out by Admati and Hellwig in The Banker’s New Clothes. Admati and Hellwig say that “higher equity requirements would therefore alleviate the problem of banks being too big, too interconnected, or too political to fail. Not only would banks be less likely to fail, they would bear more of their own losses should they incur losses.” James Pethokoukis for Business Insider agrees and sums up that “capping bank size, limiting bank activities, higher equity capital requirements — all tools in the toolbox for eliminating the crony capitalist subsidy of the US financial system by government.”

Read the articles about The Banker’s New Clothes:

The Bankers’ New Clothes Book Release Event

Anat Admati and Martin Hellwig discussed their new book, The Bankers’ New Clothes,  during a book release event at the Peterson Institute for International Economics in Washington, DC on February 11th. The event showcased Admati and Hellwig’s findings about the state of the banking system and what should be done to reform it for the better. During the event, Admati and Hellwig both spoke about the book and there was a question and answer session.

Watch the videos from the event below.

Admati and Hellwig speak about the book

Question and Answer Session

Anat Admati interview on Nightly Business Report

Anat Admati was interviewed on PBS’s Nightly Business Report on Tuesday, February 11th to talk about the size and safety of banks, and her new book The Bankers’ New Clothes. Watch the interview below.

If this video is not working, please visit the Nightly Business Report site.

Also, tune into Fox Business’s Money with Melissa Francis TONIGHT at 5:00 pm for another interview with Admati.

Padgett & Powell Guest Bloggers for Orgtheory.net: Second Post

2-7 theemergenceJohn Padgett and Walter Powell, authors of The Emergence of Organizations and Markets, are guest bloggers for February for Orgtheory.net. In their latest blog, Padgett and Powell discuss some of the mechanisms that allow multiple networks to become synced for better productivity for an organization. They also give examples of each mechanism including some successes and failures that have resulted from their application.

John F. Padgett is professor of political science and (by courtesy) professor of sociology and history at the University of Chicago. Walter W. Powell is professor of education and (by courtesy) professor of sociology, organizational behavior, management science, communication, and public policy at Stanford University.

Check out part of their second blog below.

the emergence of organizations and markets, part 2: a guest post by john padgett and woody powell

Single autocatalytic networks generate life, but they do not generate novel forms of life. There is nothing outside of a single decontextualized network to bring in to recombine with what is already there. Self-organizing out of randomness into an equilibrium of reproducing transformations, the origin of life, was a nontrivial accomplishment, to be sure. But this is not quite speciation, which is emergence of one form of life out of another.

Transpositions and feedbacks among multiple networks are the sources of organizational novelty. In a multiple-network architecture, networks are the contexts of each other. Studying organizational novelty places a premium on measuring multiple social networks in interaction because that is the raw material for innovation. Subsequent cascades of death and reconstruction may or may not turn initial transpositions (innovations) across networks into system-wide invention.

Read the rest of the post here.

 

 

Zoltan Acs on “Why Philanthropy Matters”

…For wealth to invigorate the capitalist system it needs to be “kept in rotation” like the planets around the sun, and for this task American philanthropy is very well suited. Examining the dynamics of American-style capitalism since the eighteenth century, philanthropy achieves three critical outcomes. It deals with the question of what to do with wealth–keep it, tax it, or give it away. It complements government in creating public goods. And, by focusing on education, science, and medicine, philanthropy has a positive effect on economic growth and productivity. Individuals such as Benjamin Franklin, Andrew Carnegie, Bill Gates, Michael Bloomberg and Oprah Winfrey have used their wealth to establish institutions and promote knowledge, and philanthropy has given an edge to American-style capitalism by promoting vital forces–like university research–necessary for technological innovation, economic equality, and economic security.

Philanthropy is therefore an invisible, underappreciated force for progress in American-style capitalism–the secret ingredient that fails to get mentioned in economic accounts of capitalism…

Source: “Why Philanthropy Matters” at History News Network

 

Zoltan Acs has a great article on the themes of his forthcoming book Why Philanthropy Matters over at History News Network.

bookjacket

Why Philanthropy Matters
How the Wealthy Give, and What It Means for Our Economic Well-Being
Zoltan J. Acs

 

John Padgett & Walter Powell: February Guest Bloggers for Orgtheory.net

John F. Padge2-7 theemergencett and Walter W. Powell, co-authors of The Emergence of Organizations and Markets, will be contributing to the orgtheory.net blog for the month. They will be discussing their book and other thoughts throughout the month. Fabio Rojas, an associate professor of sociology at Indiana University, says that their blog postings will be “*required* reading for sociologists, management scholars, political scientists, and economists.”

John F. Padgett is professor of political science and (by courtesy) professor of sociology and history at the University of Chicago. Walter W. Powell is professor of education and (by courtesy) professor of sociology, organizational behavior, management science, communication, and public policy at Stanford University.

Check out part of their first blog below.

emergence of organizations and markets, part I by padgett & powell

A guest post by John Padgett and Woody Powell about their new book The Emergence of Organizations and Markets:

Innovation in the sense of product design is a popular research topic today, because there is a lot of money in that. Innovation, however, in the deeper sense of new actors—new types of people, new organizational forms—is not even much on the research radar screen of contemporary social scientists, even though “speciation” (to use the biologists’ term for this) lies at the heart of historical change over the longue durée, both in biological evolution and in human history. Social science—meaning mostly economics, political science and sociology—is very good at understanding selection, both at the micro level of individual choice and at the macro level of institutional regulation and lock-in. But novelty, especially of actors but also of alternatives, has first to enter from off the stage of our collective imaginary for our existing theories to be able to go to work. Our analytical shears for trimming are sharp, but the life forces that push up novelty to be trimmed tend to escape our attention, much less our understanding. If this book accomplishes anything, we at least hope to put the research topic of speciation—the emergence of new organizational forms and people—on our collective agenda.

Read the full post here.

Justin Lin Lectures on his Book and More

In late December Justin Lin, the first non-westerner to be chief economist of the World Bank and the author of the book The Quest for Prosperity: How Developing Economies Can Take Off, gave two public lectures in the UK. During his lectures at Overseas Development Institute and London School of Economics, Lin discussed his thoughts on the state of China, the economy, and his book.

You can see both of his lectures here: