A Call for Judgment: Sensible Finance for a Dynamic Economy

by Amar Bhide

Overview

Our prosperity requires the enterprise of innumerable individuals and businesses who exercise their imagination and judgment-and bear responsibility for outcomes. And widespread enterprise is fostered through dialogue and relationships, not merely prices in anonymous markets. Yet modern finance blatantly neglects these necessary elements for enterprise. In the last several decades finance has become increasingly centralized, distanced, and mechanistic. Instead of many lending officers making judgments about borrowers they know, credit decisions are the output of the models of a few Wall Street wizards and credit agencies. This robotic centralized finance stifles the dynamism of the real economy and leads to recurring collapses. A Call for Judgment clearly explains how bad theories and mis-regulation have caused a dangerous divergence between the real economy and finance. In simple language Bhidé takes apart the so-called advances in modern finance, showing how backward-looking, top-down models were used to mass-produce toxic products. Thanks to excessively tight securities laws and loose banking laws, anonymous transactions have displaced relationship-based finance. And Bhidé offers, tough simple rules for restoring relationships and case-by-case judgment: limit banks--and all deposit taking institutions--to basic lending and nothing else. A Call for Judgment is both a primer on the role of finance in a dynamic modern economy, and a cautionary tale about the pitfalls of banks functioning as highly centralized, mechanistic entities. It is essential reading for anyone interested in bringing the economy back to a point at which decisions can be made that foster organic economic growth without the potentially disastrous risks currently accepted by modern finance.

Product Details

ISBN-13:	9780199779574
Publisher:	Oxford University Press
Publication date:	10/01/2010
Sold by:	Barnes & Noble
Format:	eBook
File size:	3 MB

About the Author

Amar Bhidé, Schmidheiny Professor at the Fletcher School at Tufts University, has served as Glaubinger Professor of Business at Columbia University, a consultant at McKinsey & Company and a proprietary trader at E.F. Hutton. Bhidé is a founding member of the Center on Capitalism and Society, editor of Capitalism and Society, and has written about the financial crisis in the Wall Street Journal, Business Week, and Forbes. Author of The Venturesome Economy, The Origin and Evolution of New Businesses, and Of Politics and Economic Reality, Bhidé received a doctorate and an MBA with high distinction from the Harvard Business School.

Table of Contents

Preface Introduction Part 1: Ordering the Innovation Game: Beyond Decentralization and Prices 1. The Decentralization of Judgment 2. The Halfway House - Coordination through Organizational Authority 3. Dialogue and Relationships 4. Reflections in the Financial Mirror Part 2: Why it Became So 5. All-Knowing Beings 6. Judgment Free Finance 7. Storming the Derivative Front 8. Liquid Markets, Deficient Governance 9. Financiers Unfettered 10. The long slog to stable banking 11. Not there Yet 12. Finally on Track 13. Derailed by Deregulation 14. Restoring Real Finance Acknowledgments [TK] Notes References Index

Editorial Reviews

"Events have raised large questions about the academic theories supporting the concept that our heavily 'engineered' financial markets are self-disciplined and efficiently allocate capital. Amar Bhidé's skeptical analysis should stimulate basic reconsideration."—Paul Volcker, chairman of the Economic Recovery Advisory Board and former chairman of the Federal Reserve

"This great book, Amar Bhidé's third in a decade, is an essential and distinct contribution in our hour of need. It first reformulates how modern capitalism does what it does best—innovation. Then, in high gear, it shows us how our capitalism has been brought down by a thousand cuts: the idea that rational investors always know precisely what they're doing, the perversion of the banking industry, the errors of deregulation and the striking errors in some new regulations. A Call for Judgment is not a cry for some auto da fé on Wall Street but rather a brilliant and reasoned plea for a basic revamp of our capitalist institutions so as to regain the dynamism of old."—Edmund S. Phelps, McVickar Professor of Political Economy and Director of the Center on Capitalism and Society, Columbia University, and 2006 Nobel laureate in Economics

"A Call for Judgment is an intellectual firecracker—full of wisdom, common sense, and hard-hitting reform proposals. Few other writers, if any, can match Amar Bhidé's deep knowledge of economic theory and historical detail with his first-hand experience in both entrepreneurship and real-world finance. It's hard to imagine a more useful analysis or guide for what must now be done."—Thomas K. McCraw, Straus Professor of Business History, Emeritus, Harvard Business School, author of Prophet of Innovation: Joseph Schumpeter and Creative Destruction

"A Call for Judgment presents many interesting insights on necessary innovations in the world of today and tomorrow. Amar Bhidé prompts also some conclusions for improving the rules and ways for future banking-supervision in the United States. This book is a very positive contribution to a necessary debate."—Hans Tietmeyer, former president, Deutsche Bundesbank

"Amar Bhidé's analysis of the economic crisis that exploded on us a few years ago is extremely informative and thought provoking. He writes from an experience both in business, where he could see what was going on around him, and in academia, where he has had the time to study and reflect on what happened and why. Bhidé's discussion of what we need to do to avoid a recurrence is illuminating and persuasive."—Richard R. Nelson, George Blumenthal Professor of International and Public Affairs, Business, and Law, Emeritus, Columbia University and winner of the 2006 Honda Prize and co-author of An Evolutionary Theory of Economic Change

From the Publisher

Bhidé (The Venturesome Economy) draws heavily on Friedrich Hayek's seminal essay, "The Use of Knowledge in Society," to argue that lending decisions had become overly mechanistic and centralized prior to the financial crisis that began in 2007 and that this was an important causal factor in the crisis. He traces this trend to an overreliance on statistical models, developed by financial economists, that often made unrealistic assumptions or were misused by practitioners, and to relatively recent changes in securities and banking regulations. Bhidé's central thesis is that the dialog and judgment required in lending are best exercised closer to the actual applicant. He suggests that banks be required to qualify loans in a more old-fashioned way—making personal, case-by-case evaluations of applicants—to prevent them from taking outsize risks. In addition, banks that accept short-term deposits from the public should be restricted in their business to lending and simple hedging. VERDICT Recommended for scholarly readers, those interested in the Austrian or Chicago schools of economics, or those who desire to be comprehensive in their study of the financial crisis.—Steve Wilson, Dayton Metro Lib., OH

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