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

• Author: Coelho, Philip R.P.
• Position: Book review

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

By Charles W. Calomiris and Stephen H. Haber

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

Pp. xi, 570. $35 doth.

Fragile by Design is an excellent and provocative book. It is an amalgam of economic history and theory combined to illuminate banking and financial history with special relevance to the recent collapse in American banking. My review is somewhat idiosyncratic; I think that the authors, Charles W. Calomiris and Stephen H. Haber, should have written a less lengthy book that concentrates on the history, antecedents, and analysis of the 2008 financial crisis. Their economic and financial histories of Mexico and Brazil, although excellent in themselves, add little to the analysis of the 2008 meltdown; my remarks concentrate on the portions of the volume that elucidate the events of 2008.

The first section, "No Banks without States and No States without Banks," contains five chapters dealing with the systematic relationship between banks and states and a banking history of the United Kingdom. It lays the foundation of the story, addressing the issue encapsulated in the title of chapter 1: "If Stable and Efficient Banks Are Such a Good Idea, Why Are They so Rare?" Calomiris and Haber argue that without political authorities' acquiescence and assistance neither banks nor advanced states can exist. Because of the random exigencies of wars and other forms of statecraft, no nonprimitive state can exist for long without immediate access to capital that only functioning banks can provide. Banks, in turn, rely on the state's enforcement powers to ensure bank creditors (depositors) that they will not be robbed by the banks and, in turn, to enable banks to enforce contracts with those who borrow from them.

The existence of adjudicators and enforcement mechanisms is the sine qua non for the existence of banking; it is what makes banking an exercise in political economy. Banking obviously requires both bankers and government; complexity is added because the number of participants in the "game of bank bargains" (a somewhat unfortunate phrase repeatedly used) is large with conflicting interests. Among the participants in the "game" are bankers (composed of insiders and other investors), depositors, borrowers, politicians, and the nonbanking public. The overarching theme that unites these disparate groups is a desire to shape the institutional environment to favor their particular interests. Which groups are best able to mold the institutional environment depends on the nature of the politics and the prevailing rules.

The authors dichotomize the political environments into two sets: one consists of various types of autocracies; the other contains democracies. Political democracies are divided into two groups: liberal democracies (limited constitutional government) and populist democracies, where constitutional limits are either nonexistent or very malleable. The authors argue that a populist democracy that is not a welfare state faces a great deal of political pressure to use the banking system to reallocate credit/ resources to politically advantaged groups. In the context of American banking history, the United States had a federal government that was severely restricted by the Constitution (until the 1930s), but the chartering and regulation of banks were almost exclusively under the domain of the states. This meant that in the United States the "game of bank bargains" was played primarily in state capitals until the electronic banking...