By James Kwak
Yes, that’s a new book photo in the sidebar to the right. The paperback edition will be available on January 11, 2011. It has a new epilogue taking the story from January 2010 (when we finished the hardcover) to September 2010, covering the financial reform debate in the Senate and the final Dodd-Frank Act.
Enjoy.
The Baseline Scenario 
I like the X-Men logo on the front.
Do purchasers of the Hardcover license get a free upgrade?
In other news, Tyler Cowen’s new piece in The American Interest is getting linked to a lot, and he includes a lengthy quote from Johnson’s “The Quiet Coup.” Nice.
Dear James K. I bought your hardcover book. In one of your blogs you mentioned an author and book that you thought was good at explaining statistics. Could you refresh our memory as to title? yar
Sorry–you could always return it and give the recipient a gift certificate for the paperback.
Congratulations on reaching paperback, James! Predictable and well deserved.
James if you don’t answer my question about that stats guy I’m going to give my hardcover and my brothers away for free :) yar
Books (IMF)
Finance & Development, June 2010, Volume 47, Number 2
http://www.imf.org/external/pubs/ft/fandd/2010/06/books.htm
R. Barry Johnston
Assistant Director
“The last section of the book, which proposes solutions, is the least developed, and that’s too bad, because this is the part that could influence the policy debate. The authors favor hard limits on the size of financial institutions, prohibiting them from exceeding a certain percentage of gross domestic product. They propose even stricter limits on the size of more risky institutions. These limits would be added to the numerous other regulatory initiatives that are under consideration (on capital, liquidity, etc.). However, the book does not go into detail on the pros and cons of using size limits instead of (or in addition to) proposals to deal with systemically important institutions by imposing systemic risk charges, placing limitations on proprietary trading, and enhancing the resolution mechanisms for large institutions. How to formulate the proposed size limits and what to cover are not addressed. More in-depth analysis and discussion of these issues would have enhanced the operational value of this stimulating book and strengthened the case for including the recommendations as part of the reforms. ”
Compare to the comprehensive job done for the Asian Crisis where “too big to Fail” was never the focus:
New Crisis, Old Problems
Andrew Sheng
From Asian to Global Financial Crisis
An Asian Regulator’s View of Unfettered Finance in the 1990s and 2000s
Cambridge University Press, Cambridge, United Kingdom, 2009, 204 pp., $26.99 (paper).
Andrew Sheng’s new book has arrived just when people need answers most. Sheng’s experience in the West and East, coupled with his background as a Hong Kong financial regulator and scholar, set the stage for this deep, broad analysis of the financial crisis, seen through Asian eyes.
Unlike many analysts, Sheng injects a personal perspective that touches on comparative history, macroeconomics, and microeconomics and sets the book’s framework. In my experience as an Asian journalist, I have never read a clearer nor more complete story of the 1990s Asian financial crisis, nor a more convincing analysis of the intrinsic links between that period and the current global crisis. But some readers may find Sheng’s coping with the crisis as a regulator more interesting than his theoretical explanations.
Sheng shows how and why current tools and institutional structures are outdated. Among the most important topics he tackles: the relationship between financial intermediaries and regulators or governments. In his view, unfettered finance is at the core of these crises.
But the real picture is far more complex. Governments tend to over- and underregulate the financial sector simultaneously. This is especially true in Asia, the author says. The financial system needs not more but better regulation.
“Regulatory cycles must include constant reviews of outcomes against objectives. These reviews must examine how the strategy, priorities, incentives, standards, structures, processes and execution have been done in the right dimensions and context,” Sheng writes. His argument is reasonable. But how can we guarantee that this happens?
In China, such reviews may be impossible at this stage of financial system development. Regulatory capture—that is, when a state regulatory agency created to act in the public interest instead acts in favor of the commercial or special interests that dominate in the industry or sector it is charged with regulating—is common in China. What is needed now are regulators who focus on making and implementing rules, not making market choices. They should improve the trading system, monitor special interest groups, ensure adequate information disclosure, penalize offenders, and educate investors.
Yet Chinese regulators show little interest in these tasks. On the contrary, having been hijacked by powerful interest groups, they implement excessively protectionist policies in the name of safeguarding investor interests. This leads to artificial control of stock supply and demand and market distortion, which creates conditions that foster rent-seeking by listed companies, turning investors into speculators. Sheng argues that “transparency is necessary but not sufficient.” That’s putting it mildly. In China, transparency is only a dream.
As Sheng points out, “The key structural problem faced by Asian economies is the legacy of a relatively closed, top-down silo governance structure faced with an open, rapidly changing and complex global market.” Exactly.
Sheng tells us that after the Asian crisis and the bursting of the dot-com bubble, the financial world undertook its most thorough overhaul since the 1930s in areas that spanned accounting, corporate governance, regulation, and national financial sectors. But these measures were not enough to stem the latest crisis. In fact, some of these measures may have contributed to the crisis. And the world is still seeking answers to critical questions, including those surrounding the problem captured in the expression “too big to fail.”
Still, there is hope for the future of financial oversight, even though events of the recent past do not portend well for the future. The logic of the rescue plan enhances the factors that create financial crises, including the current crisis. For example, the incentive mechanism in the financial sector and the principal-agent problem are all intact, if not worse, in the rescue plans. However, Sheng is hopeful. “No financial crisis is exactly alike, but there are common elements that would, I hope, help us identify and mitigate the next one,” he writes.
Our challenges are especially serious in Asia, so Sheng’s Asian regulatory perspective is particularly welcome at this juncture in market history. “There are very few books about the Asian crisis by senior Asian officials who were in place during the crisis,” he notes. “For posterity’s sake, the Asian side of the story deserves to be told.”
Sheng deserves praise for being conscious of his responsibility to history. But his most valuable contribution is that he identifies some of the major barriers to a sound financial system and points the way toward future solutions.
Hu Shuli
Editor-in-Chief, Caixin Media, and Dean, School of Communication and Design, Sun Yat-sen University
Sorry, I really don’t remember.
I want to praise the book, but in the end it is conventional and reveals nothing beyond the compromise of consensus. If it were used in a courtroom for foundation and discovery, what would it prove? Most all “corruption” is redacted from the foundation. Most all discovery is missing.
In the end it is a legitimate work of economic journalism that makes a single case for decentralizing a power center that has outgrown its ability to perceive its own threat to the rest of the upper middle class financial structure.
You say the new epilogue “covers?” the equivocations and trance inducing distractions of the “reform” ritual that just transpired among the rich and guilty.
What we needed was guidance and formulas for direction that would correct the process not dance along side it and tell us what we just saw happen with formal authority.
In the end it is all about WHO is RIGHT AND WRONG…
NOT:
WHAT is RIGHT AND WRONG.
And the ultra-conventional equivocation and compromising comes from splitting this in the first place. It is a self-deception to believe the fallacies of distinction. It is not the “lesser of two evils (or “13 Bankers”)” that is involved.
It is about evil practices that does serious damage to history and the future in praxis. It is about love of power and money taking precedent over people and community. It is about rationalizing the process to make it appear more about scale…
…and ignoring scope.
Start your second book James, and this time give us some real discovery and foundation to build a case that will defend us and the security of our real economy in the public arena that is being bought and sold on the butcher bloc of political financial power.
http://en.wikipedia.org/wiki/Tinkerbell_effect
^ Stewart, Cameron (2004), “The Rule of Law and the Tinkerbell Effect: Theoretical Considerations, Criticisms and Justifications for the Rule of Law”, Macquarie Law Journal 4 (7): 135–164, http://www.law.mq.edu.au/html/MqLJ/volume4/vol4_stewartc.pdf .
Certainty; Generality; Equality & perhaps, universality for rules not Rulers…
Perhaps the Tinkerbell effect is what is left of democracy after unfettered finance runs its course?
I just finished 13 Bankers today on BART. Great book but also pretty sad to that the political economy in this country has only gotten worse since it came out. It seems like the only prospects for systemic reform will occur after the next big crisis–which is sort of like waiting till you get lung cancer before you stop smoking.
I second the motion to give all of us who bought the hardcover version the new epilogue. Not to put too fine a point on it, but you guys wouldn’t have gotten to the paperback version without your hardcore fans who bought the hardcover version!!
Dear James. This blog is for real. You actually do read and answer questions. Thanks again. yar
Please rethink Theodore Roosevelt and trustbusting, for what occurred is interpenetration of business and government in its initial structural phase (hence, historical antecedents of regulatory capture, only with TR we see a more integrated structure intended for a consolidated economic base and aggressive thrust into world markets). Your reading of TR’s Fist Annual Message (as well as relations to House of Morgan) is wrong. In the Message (full text in my reader with Frank Freidel many years ago) TR laid out a clear blueprint.
I quote almost at random: “Business concerns which have the largest means at their disposal and are managed by the ablest men are naturally those which take the lead in the strife for commercial supremacy among the nations of the world….It is of the utmost importance that this position [commanding position in the international business world] be not jeoparded….” Then, a superb statement on trickle-down: “Moreover, it cannot too often be pointed out that to strike with ignorant vioence at the interests of one set of men almost inevitably endangers the interests of all. The fundamental rule in our national life–the rule which underlies all others–is that, on the whole, and in the long run, we shall go up or down together.” And perhaps the clincher, one paragraph later: “The mechanism of modern business is so delicate that extreme care must be taken not to interfere with it in a spirit of rashness or ignorance.” There is so much more in the Message, such as: “Publicity is the only sure remedy which we can now invoke.”
I am not adept at Internet use and found no other way to reach you. If this is read, I would be grateful for a reply at my email address, pollackn@msu.edu. I raise this because I see in Prof. Johnson many of the insights and grasp I came to know at Harvard and Yale a half-century ago. It is as though, from the standpoint of historical knowledge, the academic world and especially economists have drawn a line at about 1970, before which little is worth reading. We have not really gone beyond the understanding of Masao Maryuma, in Political Thought and Behavior in Japan, or Gabriel Kolko’s Triumph of Conservatism in our thinking about what Masao called “the close-embrace relationship” in referring to government-business ties. Than you for your attention. NP