Posted by: Dirk | July 5, 2010

(Book review) 13 bankers

Simon Johnson and James Kwak have followed the rise of Wall Street banks by retelling the history of the US financial sector. They describe how financial markets were deregulated by Reagan, who chose Greenspan over Volcker because the former shared his ideology. The thread of the book is the too-big-too-fail issue. Banks have evolved bigger than ever through the crisis, their influence being not weaker than before but probably stronger (see figure 7-1 on p. 203).

Johnson and Kwak propose a fragmentation of the banking system in order to make banks smaller and banking boring (again). Actually, they should read Gary Gorton’s “Slapped by the Invisible hand”, since Gorton argues that it was the increase in competition through deregulation that made banks search for profits. While they had partial monopolies, the bank charters have been valuable, and there was no need for potentially risky expansion. Maybe a synthesis of Gorton and Kwak/Johnson would be a good point to start reform in the financial sector.

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