By James Kwak
Not surprisingly, there is a great deal of interesting research being done in the area of financial institutions, systemic risk, and regulatory reform. Last week I had the pleasure of attending a workshop for junior law professors held by the Insurance Law Center of the UConn Law School, where I am a professor. The workshop featured a long list of provocative and weighty papers at various stages of completion. Here I just want to point out a few that are fully drafted and available on SSRN.
Robert Weber presented what should be the canonical paper on stress testing as applied to financial institutions, which has been going on for a while but became front-page news in 2009, during the financial crisis. He traces the history of stress testing back to its engineering roots in Renaissance Italy with, perhaps unsurprisingly, Leonardo da Vinci. Weber is critical of box-checking stress testing, but argues that stress testing can be useful as a way of encouraging or inducing bank executives and risk managers to more closely investigate their assumptions and beliefs and ultimately create a “morality of quantitative skepticism.”
Gallons of ink have been spilled over the Orderly Resolution Authority established in Title II of the Dodd-Frank Act, generally over whether and how it would be used in a crisis. In 13 Bankers, Simon and I expressed skepticism that it would be used, for practical and political reasons. Joshua Mitts’s paper takes the novel approach of looking at how OLA affects managerial incentives in the pre-crisis period, arguing that it encourages bank executives to design their firms in such a way as to maximize the chance of a taxpayer bailout. This would lead them to increase their exposure to other large financial institutions and to increase the correlation of their asset portfolios with those of other large firms.
Mehrsa Baradaran takes a historical view in her paper, which is about the social contract between banks and society as expressed through banking regulation. She begins with the Hamilton-Jefferson debates over banks (which is also where we began 13 Bankers) and covers the history of banking regulation (or non-regulation) up to the 1930s, which represented the most thorough codification of the social contract: the government needs banks, but banks also need the government. The past few decades, however, have seen an erosion of this social contract, giving banks the benefits of government sponsorship and support without the obligations necessary to ensure that they serve societal ends. Baradaran argues that banking regulation should incorporate a robust public benefit test to ensure that banks are in fact helping households, the economy, and society at large.
There are other interesting papers that are sure to come out of this workshop. One small side benefit of the financial crisis has certainly been the increased attention to the financial sector and the risks it presents to the rest of us.
By James Kwak
I’ve been reading a lot of books lately, some of which I’ve mentioned here: The Submerged State by Suzanne Mettler, Invisible Hands by Kim Phillips-Fein, The Wealth and Poverty of Nations (finally) by David Landes, Exorbitant Privilege by Barry Eichengreen, and a pile of books on the national debt and deficit politics. (Despite moonlighting as a blogger, I find books more satisfying than the constant stream of newspapers, magazines, and blogs.) But my favorite book I’ve read in a while is Railroaded: The Transcontinentals and the Making of Modern America, by the historian Richard White.*
For some people, most notably Rick Perry but also much of the conservative base, the late nineteenth century was the golden age: of the gold standard, no income tax, senators elected by state legislatures, and, most importantly, little to no government “regulation” of business. White shows what that world was really like.
By James Kwak
Simon and I wrote an article for the November issue of Vanity Fair about—well, about a lot of things. It’s about the eighteenth-century rivalry between Great Britain and France, the lessons of the American Revolutionary War, the Hamilton-Jefferson debates (again), and the War of 1812. It’s also about present-day fiscal policy and budgetary politics. The main question we take up is what the Founding Fathers (from the Constitutional Convention through their involvement in the War of 1812) thought about a strong central government, the national debt, and the taxes necessary to pay for them, and what that means for today. All that in less than 3,000 words, so there isn’t a lot of room for all the details.
You can read the article online here.
By James Kwak
It has become a truism that modern American conservatism is revolutionary in the sense that it seeks to overturn the established order rather than to preserve it. “Reagan Revolution,” “Tea Party”—the very names for the movement announce that is about more than defending the status quo. In the conservative worldview, America (or “Washington,” or the “mainstream media,” or some other powerful stratum) is dominated by a liberal-intellectual-academic-bureaucratic-socialist-internationalist (pick two or more) elite that must be overthrown. So in at least a mythical sense, conservatism is about restoration, which is something very different from “conserving” what exists today.
When did this happen? According to one view of the world, to which I have been partial in the past, there was once an ideology called conservatism that really was conservative in the narrow sense: that is, it counseled maintaining existing institutions on the grounds that radical change was dangerous. The Rights of Man and the Citizen may be great, but soon enough you have the Committee of Public Safety and the guillotine. On this reading of history, conservatism became radical sometime after World War Two, when it gave up accommodation with the New Deal in favor of rolling the whole thing back, ideally all the way through the Sixteenth Amendment.
In The Reactionary Mind,* however, Corey Robin has a different take: conservatism, all the way back to Edmund Burke, has always been about counterrevolution, motivated by the success of left-wing radicals and consciously copying their tactics in an attempt to seize power back from them. Conservative thinkers were always conscious of the nature of modern politics, which required mobilization of the masses long before Nixon’s silent majority or contemporary Tea Party populism. The challenge is “to make privilege popular, to transform a tottering old regime into a dynamic, ideologically coherent movement of the masses” (p. 43). And the way to do that is to strengthen and defend privilege and hierarchy within all the sub-units of society (master over slave, husband over wife, employer over worker).
By James Kwak
Today’s Atlantic column is about one of my favorite topics: the French Revolution. Actually, it’s mainly about tax expenditures and how traditional Republicans should want to eliminate them. Unfortunately, there are no traditional Republicans left, and Grover Norquist’s anti-tax pledge makes clear that you can’t eliminate tax expenditures unless you use all the revenue to lower tax rates below where George W. Bush put them.
By James Kwak
For Christmas, Simon gave me a copy of Why the West Rules — For Now, by Ian Morris. I thought it was an amusing but flawed book and put it back on my shelf, but yesterday a friend told me that everyone was talking about the book and I should say what I thought about it. So here goes. (And bear in mind that I do have a Ph.D. in history — though no one has a Ph.D. in all of the history that Morris covers.)
First of all, it’s a fun read. It isn’t particularly engaging, and the narrative is pretty weak (not the author’s fault — it’s just that the history of all of human civilization just doesn’t make for a great story), but it’s filled with interesting historical facts and fills in all those gaps in your knowledge of ancient history. My knowledge of ancient history was mainly gaps, so it was news to me that Western civilization began not in Mesopotamia, as I was taught thirty years ago, but in the “Hilly Flanks” — an arc that runs mainly through Western Syria, Southeastern Turkey, and the Iraq-Iran border.
Posted in Books