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After the Fall: Saving Capitalism from Wall Street and Washington
Robust financial markets support capitalism, they don't imperil it. But in 2008, Washington policymakers were compelled to replace private risk-takers in the financial system with government capital so that money and credit flows wouldn't stop, precipitating a depression.
Washington's actions weren't the start of government distortions in the financial industry, Nicole Gelinas writes, but the natural result of 25 years' worth of such distortions.
In the early eighties, modern finance began to escape reasonable regulations, including the most important regulation of all, that of the marketplace. The government gradually adopted a "too big to fail" policy for the largest or most complex financial companies, saving lenders to failing firms from losses. As a result, these companies became impervious to the vital market discipline that the threat of loss provides.
Adding to the problem, Wall Street created financial instruments that escaped other reasonable limits, including gentle constraints on speculative borrowing and requirements for the disclosure of important facts.
The financial industry eventually posed an untenable risk to the economy -- a risk that culminated in the trillions of dollars' worth of government bailouts and guarantees that Washington scrambled starting in late 2008.
Even as banks and markets seem to heal, lenders to financial companies continue to understand that the government would protect them in the future if necessary. This implicit guarantee harms economic growth, because it forces good companies to compete against bad.
History and recent events make clear what Washington must do.
First, policymakers must reintroduce market discipline to the financial world. They can do so by re-creating a credible, consistent way in which big financial companies can fail, with lenders taking their warranted losses. Second, policymakers can reapply prudent financial regulations so that markets, and the economy, can better withstand inevitable excesses of optimism and pessimism. Sensible regulations have worked well in the past and can work well again.
As Gelinas explains in this richly detailed book, adequate regulation of financial firms and markets is a prerequisite for free-market capitalism -- not a barrier to it.
Washington's actions weren't the start of government distortions in the financial industry, Nicole Gelinas writes, but the natural result of 25 years' worth of such distortions.
In the early eighties, modern finance began to escape reasonable regulations, including the most important regulation of all, that of the marketplace. The government gradually adopted a "too big to fail" policy for the largest or most complex financial companies, saving lenders to failing firms from losses. As a result, these companies became impervious to the vital market discipline that the threat of loss provides.
Adding to the problem, Wall Street created financial instruments that escaped other reasonable limits, including gentle constraints on speculative borrowing and requirements for the disclosure of important facts.
The financial industry eventually posed an untenable risk to the economy -- a risk that culminated in the trillions of dollars' worth of government bailouts and guarantees that Washington scrambled starting in late 2008.
Even as banks and markets seem to heal, lenders to financial companies continue to understand that the government would protect them in the future if necessary. This implicit guarantee harms economic growth, because it forces good companies to compete against bad.
History and recent events make clear what Washington must do.
First, policymakers must reintroduce market discipline to the financial world. They can do so by re-creating a credible, consistent way in which big financial companies can fail, with lenders taking their warranted losses. Second, policymakers can reapply prudent financial regulations so that markets, and the economy, can better withstand inevitable excesses of optimism and pessimism. Sensible regulations have worked well in the past and can work well again.
As Gelinas explains in this richly detailed book, adequate regulation of financial firms and markets is a prerequisite for free-market capitalism -- not a barrier to it.
250 pages, Hardcover
First published January 1, 2009
5 people are currently reading
94 people want to read
About the author
Nicole Gelinas
3 books12 followersNicole Gelinas is the Searle Freedom Trust Fellow at the Manhattan Institute and a contributing editor of City Journal. Gelinas writes on urban economics and finance, municipal and corporate finance, and business issues. She is a Chartered Financial Analyst (CFA) charterholder and a member of the New York Society of Securities Analysts.
Gelinas has published analysis and opinion pieces on the op-ed pages of The New York Times, The Wall Street Journal, the Los Angeles Times, the San Diego Union Tribune, the New York Sun, the New York Daily News, the New York Post, the Dallas Morning News, the New Orleans Times-Picayune, and the Boston Herald. She has also written for Crain's New York Business and National Review Online.
Gelinas graduated from the Newcomb College of Tulane University with a B.A. in English literature. She and her husband live in Manhattan.
Gelinas has published analysis and opinion pieces on the op-ed pages of The New York Times, The Wall Street Journal, the Los Angeles Times, the San Diego Union Tribune, the New York Sun, the New York Daily News, the New York Post, the Dallas Morning News, the New Orleans Times-Picayune, and the Boston Herald. She has also written for Crain's New York Business and National Review Online.
Gelinas graduated from the Newcomb College of Tulane University with a B.A. in English literature. She and her husband live in Manhattan.
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Displaying 1 - 6 of 6 reviews
February 12, 2010
A remarkably even handed and succinct investigation into the economic crisis of the past two years. While there are similarities to the speculative exuberance of the 1920's, the author concentrates on the last 25 years and the development of hedge funds, derivatives, and other highly sophisticated financial instruments which were for the most part unregulated and misunderstood. This is a clear well thought out analysis
July 24, 2010
This modest looking, elegantly written book is actually one of the best analyses of the "Too Big To Fail" phenomenon that you can read. Gelinas is a real free marketer, so she doesn't like what goes on either in Washington or on Wall Street, something which partisans on both sides might find confusing.
May 26, 2012
Gelinas covers a hundred years of financial history succinctly, demonstrating that attempts to squeeze wealth from thin air are nothing new. Her steady analysis doesn't quite grip the reader with compelling stories, but it gets the job done.
She argues that the financial crisis circa 2007-2008 culminated from many erroneous policy decisions over the previous 25 or 30 years, chief among them the bailouts of commercial bank Continental Illinois (in 1984) and the ridiculously-named hedge fund Long Term Capital Management (in 1998). I won't elaborate on all the water under the bridge in this review. You'll have to read the book. Suffice it to say, the river of stupidity seems to keep on rolling.
She makes a strong case for properly structured markets as the solution, not the problem. I can't help pointing out that the "market" mentality towards law, elections, and executive compensation is part of what has given us such a bad outcome. Self-interest is neither an ethic nor an ideal; it is the reason for one. After all, it's in an official's self-interest to enable the illusion of prosperity through easy credit if the bankruptcies and debt defaults don't occur on their watch. Bribery, theft, whatever--as long as the consequence can be dodged, self-interest rates everything AAA.
Anyway, plenty of suggestions for improved policy: the line between loans and securities has blurred so that reinstating Glass-Steagall to separate the two may not be effective. Transparency is key--eliminate ratings, as they only obscure price signals as a measure of risk. Put everything on an exchange, where it can be seen and priced by the collective knowledge of the market. Impose capital requirements on any source of credit creation, whether mortgage lenders, hedge funds, or insurers. Consider a separate form of bankruptcy for financial institutions, as well as FDIC takeover reforms. And last but not least: NO. MORE. BAILOUTS.
She argues that the financial crisis circa 2007-2008 culminated from many erroneous policy decisions over the previous 25 or 30 years, chief among them the bailouts of commercial bank Continental Illinois (in 1984) and the ridiculously-named hedge fund Long Term Capital Management (in 1998). I won't elaborate on all the water under the bridge in this review. You'll have to read the book. Suffice it to say, the river of stupidity seems to keep on rolling.
She makes a strong case for properly structured markets as the solution, not the problem. I can't help pointing out that the "market" mentality towards law, elections, and executive compensation is part of what has given us such a bad outcome. Self-interest is neither an ethic nor an ideal; it is the reason for one. After all, it's in an official's self-interest to enable the illusion of prosperity through easy credit if the bankruptcies and debt defaults don't occur on their watch. Bribery, theft, whatever--as long as the consequence can be dodged, self-interest rates everything AAA.
Anyway, plenty of suggestions for improved policy: the line between loans and securities has blurred so that reinstating Glass-Steagall to separate the two may not be effective. Transparency is key--eliminate ratings, as they only obscure price signals as a measure of risk. Put everything on an exchange, where it can be seen and priced by the collective knowledge of the market. Impose capital requirements on any source of credit creation, whether mortgage lenders, hedge funds, or insurers. Consider a separate form of bankruptcy for financial institutions, as well as FDIC takeover reforms. And last but not least: NO. MORE. BAILOUTS.
July 28, 2010
I read this without much context, but the author was able to get her point across to me despite my handicap.
The history of how we got to "too big to fail" was complete and the recommendation on how to get out of the trap was pointed and straightforward.
The history of how we got to "too big to fail" was complete and the recommendation on how to get out of the trap was pointed and straightforward.
March 21, 2010
A clear and concise summary of the financial crisis and its causes, along with recommendations to fix the problem. Protip: Chanting that we need "tough" regulation is not going to fix the problem.
Displaying 1 - 6 of 6 reviews