Fragile by Design: The Political Origins of Banking Crises and Scarce Credit.

• Author: McKinley, Vern
• Position: Book review

Fragile by Design: The Political Origins of Banking Crises and Scarce Credit

Charles W. Calomiris and Stephen H. Haber

Princeton, N.J.: Princeton University Press, 2014, 570 pp.

Charles Calomiris and Stephen Haber have taken on a big task in their book, Fragile by Design: The Political Origins of Banking Crises and Scarce Credit. Their goal is to explain the double hit that economies and financial systems suffer when they experience a banking crisis and then the tightening of credit that often follows. In order to keep the final product manageable, and thus avoid having a 2,000 page book, the authors limit their case studies to the United Kingdom, United States, Canada, Mexico, and Brazil. Their time frame extends back to the 17th century. At its core, their argument is that financial crises are not random; they flow from the "Game of Bank Bargains"--that is, political deals that dictate everything in a banking system from the issuance of licenses to the means for distribution of credit.

Charles Calomiris is well-known to those who have studied financial panics and crises. He is the co-author of The Origins of Banking Panics and Contagion and Bank Failures during the Great Depression, to name just a few of his widely cited works. Stephen Haber has undertaken research predominantly on Latin American political and economic policy, with particular emphasis on Mexico.

Fragile by Design attempts to draw conclusions about a wide range of financial crises in different countries over a period of centuries and brings to mind Carmen Reinhart and Kenneth Rogoff s This Time Is Different: Eight Centuries of Financial Folly (2009). In contrast to the Calomiris and Haber argument that the existence of banking crises is nonrandom, Reinhart and Rogoff imply the opposite: "Banking crises remain a recurring problem everywhere.... The incidence of banking crises proves to be remarkably similar in both high-income and middle- to low-income countries. Indeed, the tally of crises is particularly high for the world's financial centers.... Perhaps more surprising still are the qualitative and quantitative parallels across disparate income groups."

Additionally, there are some starkly contrasting definitional differences between the two works. Calomiris and Haber argue that Canada has experienced precisely zero systemic banking crises since 1840. Their underlying definition of "banking crisis" is restrictive in nature as it includes those events where the insolvency of banks or the costs of intervention exceed a stated percentage of GDP (a common definition among widely cited works by the International Monetaiy Fund and World Bank) or that involve widespread bank runs without significant insolvencies or interventions. In contrast, Reinhart and Rogoff impose less restrictive standards. Under their definition, Canada has experienced seven such crises since...