The Future of Finance
By Arnold Kling
That is the title of a new book that resulted from this symposium sponsored by the London School of Economics. Chapters can be downloaded individually here. They do not add up to a coherent whole, and some appeal to me more than others.
My favorite chapter by far is Should We Have Narrow Banking? by John Kay. You have heard me say that we should aim for a banking system that is easy to fix rather than hard to break. Kay does a splendid job of articulating that point of view and of making proposals to carry it out. For example,
Even if the assertion that supervision will prevent future failure were credible – and it is not – the outcome would not deal with either the political problem or the economic problem that “too big to fail” raises. “Too big to fail” is not compatible with either democracy or a free market.
Read the whole thing.
Peter Boone and Simon Johnson also have a chapter, and I agree with much of what they have to say. I was particularly interested in their perspective on why Canadian banks survived the financial crisis. I was inclined to attribute their success to Canadian mortgages, which differ from ours in a number of ways. In particular, they are “recourse” loans, which means that if you walk away from the property, the bank can come after you for the loss it takes in selling the property.
However, Boone and Johnson offer a different explanation for the solvency of Canadian banks: luck. They argue that Canada’s banking system had contracted in the late 1990’s, and it was only just beginning to expand when the financial crisis hit. Therefore, it had the good fortune not to have reached the heights of scale and leverage that the U.S. and the U.K. had managed by 2007.
Several chapters, particularly the first two, ask whether the growth of finance is good or bad for the economy as a whole. Boone and Johnson answer this in the negative. So would I. For some reason, the mainstream view is that if securitization would die without government support, then government must support it. I draw the exact opposite conclusion.
Paul Woolley contributes a chapter that reminds me of Joseph Stiglitz at his worst. The general tenor of the piece is that markets are awful, and the author has all the answers. However, Woolley’s chapter is very unrepresentative of the volume as a whole. Most of the authors steer clear of Olympian pronouncements and instead emphasize gaps in our theoretical and empirical understanding of the financial sector.