Guardians of Finance: Making Regulators Work for Us

by James R. Barth, Gerard Caprio, Ross Levine

Overview

How the unaccountable, unmonitorable, and unchecked actions of regulators precipitated the global financial crisis; and how to reform the system.

The recent financial crisis was an accident, a “perfect storm” fueled by an unforeseeable confluence of events that unfortunately combined to bring down the global financial systems. Or at least this is the story told and retold by a chorus of luminaries that includes Timothy Geithner, Henry Paulson, Robert Rubin, Ben Bernanke, and Alan Greenspan.

In Guardians of Finance, economists James Barth, Gerard Caprio, and Ross Levine argue that the financial meltdown of 2007 to 2009 was no accident; it was negligent homicide. They show that senior regulatory officials around the world knew or should have known that their policies were destabilizing the global financial system and yet chose not to act until the crisis had fully emerged.

Barth, Caprio, and Levine propose a reform to counter this systemic failure: the establishment of a “Sentinel” to provide an informed, expert, and independent assessment of financial regulation. Its sole power would be to demand information and to evaluate it from the perspective of the public—rather than that of the financial industry, the regulators, or politicians.

Product Details

ISBN-13:	9780262300766
Publisher:	MIT Press
Publication date:	02/10/2012
Series:	The MIT Press
Sold by:	Penguin Random House Publisher Services
Format:	eBook
Pages:	296
File size:	1 MB
Age Range:	18 Years

About the Author

James R. Barth is Lowder Eminent Scholar in Finance at Auburn University and Senior Finance Fellow at the Milken Institute.

Gerard Caprio Jr. is William Brough Professor of Economics and Chair of the Center for Development Economics at Williams College.

Ross Levine is the Willis H. Booth Chair in Banking and Finance at the University of California, Berkeley, and Senior Fellow at the Milken Institute.

What People are Saying About This

Nouriel Roubini

This book will become a classic for those who want to learn what was behind the global financial crisis — not just what went wrong, but why current reforms won't work. Most important, it offers guidelines to prevent the next crisis by forcing regulators, the Guardians of Finance, to work for the public interest rather than for narrow elites.

Raghuram G. Rajan

There have been plenty of books on the financial crisis. But this one is different. While acknowledging that private financiers did plenty of damage, the authors shine the spotlight on regulators across the world. They argue that the crisis did not just happen to policymakers, it happened because of them, and offer careful and well-reasoned arguments to support their case. Guardians of Finance should be read by everyone interested in the future of free enterprise.

Stephen Haber

Financial crises are not in the interests of bankers, regulators, or politicians. Yet all three groups did nothing as the U.S. financial system headed over a cliff. Why didn't they act? Why did their counterparts in other countries,such as Ireland and Iceland, also stick their heads in the sand? Is there a way to prevent the next crisis, or do we have to rely on the same groups that brought us the ongoing disaster of 2007? Read this meticulously researched and clearly argued book, and learn the answers.

Endorsement

Financial crises are not in the interests of bankers, regulators, or politicians. Yet all three groups did nothing as the U.S. financial system headed over a cliff. Why didn't they act? Why did their counterparts in other countries, such as Ireland and Iceland, also stick their heads in the sand? Is there a way to prevent the next crisis, or do we have to rely on the same groups that brought us the ongoing disaster of 2007? Read this meticulously researched and clearly argued book, and learn the answers.

—Stephen Haber, Stanford University

From the Publisher

This book will become a classic for those who want to learn what was behind the global financial crisis—not just what went wrong, but why current reforms won't work. Most important, it offers guidelines to prevent the next crisis by forcing regulators, the Guardians of Finance, to work for the public interest rather than for narrow elites.

—Nouriel Roubini, Co-Founder and Chairman, Roubini Global Economics

This book involves a strongly, even passionately, argued attack on financial regulators for having made a mess of financial regulation, prior to 2007. It is beautifully written, and very well designed to achieve a wide audience of readers who are interested in the crisis, but are not necessarily themselves expert. It is based on great academic expertise, but wears its deep scholarship lightly, with no maths and no equations.

—Charles Goodhart, London School of Economics

There have been plenty of books on the financial crisis. But this one is different. While acknowledging that private financiers did plenty of damage, the authors shine the spotlight on regulators across the world. They argue that the crisis did not just happen to policymakers, it happened because of them, and offer careful and well-reasoned arguments to support their case. Guardians of Finance should be read by everyone interested in the future of free enterprise.

—Raghuram G. Rajan, The University of Chicago Booth School of Business

Financial crises are not in the interests of bankers, regulators, or politicians. Yet all three groups did nothing as the U.S. financial system headed over a cliff. Why didn't they act? Why did their counterparts in other countries, such as Ireland and Iceland, also stick their heads in the sand? Is there a way to prevent the next crisis, or do we have to rely on the same groups that brought us the ongoing disaster of 2007? Read this meticulously researched and clearly argued book, and learn the answers.

—Stephen Haber, Stanford University

Charles Goodhart

This book involves a strongly, even passionately, argued attack on financial regulators for having made a mess of financial regulation, prior to 2007.

It is beautifully written, and very well designed to achieve a wide audience of readers who are interested in the crisis, but are not necessarily themselves expert.

It is based on great academic expertise, but wears its deep scholarship lightly,with no maths and no equations.

Editorial Reviews

Despite the complex subject, this incisive book presents a straightforward thesis: the financial meltdown of 2007–2009 happened largely because the “Guardians of Finance” (market regulatory agencies) failed to represent the public interest. In lively prose, Barth (Auburn University finance scholar), Caprio (economics professor at Williams College), and Levine (economics professor at Brown University) review how and why this happened, focusing on changes in organizational structure. The evolution of banks and brokerages from partnerships to limited liability corporations encouraged risk taking and put a premium on expansion, high volume, and quick turnover. For market participants, this was a rational response to the prevailing incentives. Securitization enabled mortgage originators to package bundles of mortgages for sale and pass along the consequences of potential loan default to others, while rating agencies knew that traditional caution might send business to more compliant rivals. Exploding the myth that banks were unregulated during this period, the authors instead ask why regulators were ineffective even though Fed staff understood “the growing fragility of the financial system in the decade before the crisis.” Rejecting rote expansion of regulatory ranks and authority, they propose creating an independent “Sentinel” agency, staffed with experts, to provide “an ongoing assessment that seeks to identify problems with financial regulation before they trigger a crisis,” and present a strong case for this informed outside perspective. (Mar.)

Publishers Weekly

This is a timely, well-written, and nontechnical book by established experts in the field.—R.Grossman, Choice—

For those involved in policy formulation and regulation, whether at national or international level, in government or financial institutions, this is compulsory reading.

—Richard Parlour, Central Banking Journal—

From the Publisher

For those involved in policy formulation and regulation, whether at national or international level, in government or financial institutions, this is compulsory reading.

—Richard Parlour, Central Banking Journal

Reviews

For those involved in policy formulation and regulation, whether at national or international level, in government or financial institutions, this is compulsory reading.

Richard Parlour

This is a timely, well-written, and nontechnical book by established experts in the field.

Choice R.Grossman