The Crisis in American Banking.

• Author: Vaughan, Mark

The Crisis in American Banking forced me to think about the yardstick by which to measure an academic book. It struck me that the appropriate criterion is "opportunity cost"; will the reader learn enough from Crisis to justify the opportunity cost of time spent? Unfortunately, the target market of the book is unclear; it is, therefore, difficult to answer this question.

Crisis contains six conference papers and an editor's introduction. In the introduction, White promises that the book offers a fresh perspective on banking issues, a perspective informed by insights from public choice and Austrian economics. He says that the common thread running through each of the essays is that poorly designed policies--such as branching restrictions and mispriced deposit insurance--are responsible for U.S. banking woes. The policy implication is that government shouldn't meddle in the banking sector. If the book's target audience is professional economists with an interest in banking, I doubt that these insights will strike the prospective reader as fresh. However, several of the essays could prove useful pedagogical tools in an undergraduate banking course.

In the first essay, White answers the question, "Why is the U.S. Banking Industry in Trouble?" He traces the trouble to bad loans, in turn, attributed to a combination of regional shocks, misguided monetary policy, increased competition from other credit suppliers, and badly crafted government regulation. White weaves his arguments--together with statistical evidence--into a credible call for narrow banking. On the whole, the essay gives a good overview of the recent plight of the banking industry, though Boyd and Gertler, in a similar essay in the NBER Macroeconomics Annual 1993, do a better job. They offer much more data and analysis as well as an interesting set of discussant comments that differentiates the economic and finance perspectives on banking.

In the next chapter, "Public-Sector Deficits and Private-Sector Performance," Roger Garrison presents the Austrian view of budget deficits. To Austrians, deficits have different negative effects on the economy at different times; hence, it is misleading to interpret the absence of an empirical link between deficits and a single variable, say interest rates, as proof that federal red ink does not matter. Moreover, Austrians hold that the overarching evil of deficits is that they increase the level of uncertainty with which economic agents must cope...