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The Crisis in American Banking

Edited by Lawrence H. White
Copyright Date: 1993
Published by: NYU Press
Pages: 184
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  • Book Info
    The Crisis in American Banking
    Book Description:

    The U.S. banking system, its regulation and deregulation, and especially its deposit guarantees, continue to pose complex problems. The Crisis in American Banking offers six original perspectives on this continuing crisis, drawing from modern Austrian economics and from public choice theories that have seldom been applied to contemporary banking troubles. The contributors suggest that political regulation has seriously impaired the health of the banking industry. The authors consider long-term prospects for reform in the banking industry in light of the regulatory environment Much in the news lately, the U.S. banking system, its regulation and deregulation, and its troubles, pose a persistent and complex problem for Americans. This timely volume offers six original perspectives keyed to the continuing crisis in the U.S. banking industry. Several authors draw from modern Austrian economics or from public choice theory ideas that have seldom been applied to explaining contemporary banking problems. A pervasive theme of the ideas presented is that the U.S. banking crisis is fundamentally linked to the political regulation of banking. Taken as a whole, the book suggests that government regulatory, macroeconomic, and fiscal policies have seriously impaired the health of the banking industry. The Crisis in American Banking compellingly explains how rent-seeking, ideology, and the historical accretion of regulations have given banking policy its current unfortunate form. Also considered are the long term prospects for reform of banking regulation, and for the banking industry itself in light of the current and foreseeable regulatory environment. At present, the state of the U.S. commercial banking industry and the FDIC suggests disturbing parallels to the state of the savings and loan industry and the FSLIC a decade earlier. The policy regime that allowed their problems to develop does not seem to be on the verge of any dramatic change. The reluctance of Congress to enact real reforms means that the critical analyses and reform proposals in this volume will remain relevant for some time to come.Contributing to the volume are: Gerald P. Driscoll, Jr. (Vice President and Economic Advisor, Federal Reserve Bank of Dallas), Roger W. Garrison (Auburn University), Thomas Havrilesky (Duke University), George G. Kaufman (Loyola University of Chicago), Richard M. Salsman (Vice President, Financial Institutions Group of Citibank), and Walker Todd (Gulliver Foundation, San Francisco).

    eISBN: 978-0-8147-8498-3
    Subjects: Finance

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Foreword
    (pp. vii-x)
    Mario J. Rizzo

    This book,The Crisis in American Banking, is the first in a new series of books that will be published under the rubric of the “Political Economy of the Austrian School.” The essays collected here are the revised versions of papers presented at a conference at New York University on April 29, 1991. The financial support for this conference was provided by the Sarah Scaife Foundation. We are indebted to the foundation and its president, Richard M. Larry, for generous support, not only of this conference but also of the Austrian Economics Program at New York University over a period...

  4. Introduction
    (pp. 1-6)
    Lawrence H. White

    This volume offers six original essays keyed to the continuing crisis in the U.S. banking industry. Five were first presented at a small conference—more like a series of seminars—on “The Crisis in the Banking Industry,” sponsored by NYU’s Austrian Economics Program (which is directed by Israel Kirzner). The conference was organized by Mario Rizzo and myself, and was held at New York University on April 29, 1991. The papers generated lively discussion among the authors and other participants in the conference, and have been revised to reflect (or deflect) constructive criticism received there. A sixth paper, by Richard...

  5. 1 Why Is the U.S. Banking Industry in Trouble? Business Cycles, Loan Losses, and Deposit Insurance
    (pp. 7-28)
    Lawrence H. White

    We learned from the U.S. thrift-industry debacle that congresspeople and regulators have incentives to mask and deny the size of insolvencies among deposit-taking institutions when they first arise. Rather than promptly resolve the widespread insolvencies that existed among thrifts in 1981, the authorities chose to revise the regulatory accounting rules, to practice “forbearance,” and to gamble that economically insolvent thrifts might climb back into the black (Eisenbeis 1990, 19–20). As it turned out, the cost of resolving the problem grew, to the point where taxpayers have been saddled with an enormous expense in covering the thrift deposit guarantees made...

  6. 2 Public-Sector Deficits and Private-Sector Performance
    (pp. 29-54)
    Roger W. Garrison

    The detrimental effects of public-sector deficits on private-sector performance can be established without reference to determinate and empirically demonstrable effects of budgetary deficits on interest rates, inflation rates, or exchange rates. The arguments in this chapter, in fact, depend upon the absence of reliable predictions concerning such specific effects. The certainty that deficits must somehow be accommodated, coupled with the uncertainty about just how they will be accommodated, can result in a significant degradation of economic performance in the private sector. The word “performance” is used here and throughout the chapter in place of the more narrowly conceived “efficiency.” The...

  7. 3 An Empirical Analysis of Public Choice Aspects of the Savings and Loan Disaster
    (pp. 55-80)
    Thomas Havrilesky

    About the only thing that has grown faster than the tab for the savings and loan mess is the amount of literature devoted to it. Unfortunately, as this literature has snowballed, the proportion of statistical analysis has shrunk. Perhaps the most noticeable shortfall lies in the interstices between the economic and political aspects of the problem. This deficiency persists despite growing interest in politico-economic/public choice theories of banking regulation. Economists are increasingly aware that their earlier emphasis on the market failure theory of regulation caused them to regard too lightly the self-serving behavior of politicians and interest groups that created...

  8. 4 Bankers as Scapegoats for Government-Created Banking Crises in U.S. History
    (pp. 81-118)
    Richard M. Salsman

    If there is anything more tragic than our current banking crisis, it is that the crisis is being blamed on the wrong group, on the bankers, instead of on the primary culprit, government intervention. The tragedy lies in failing to identify the fundamental cause of the problem, thereby ensuring its continuance. Bankers are not entirely innocent of wrongdoing in the present debacle, but to the extent that bankers have been irresponsible, it has been primarily government intervention that has encouraged them to be so. More widely, it is irresponsible government policy that has made the U.S. banking crises of the...

  9. 5 Deposit Insurance Reform Is Not Enough
    (pp. 119-138)
    Walker Todd and Gerald P. O’Driscoll Jr.

    Deposit insurance reform is the cornerstone of virtually every banking reform proposal. The deficiencies of the present system of deposit insurance are widely acknowledged, and debate has turned increasingly to how, and not whether, the system should be changed.¹

    In this chapter we argue that deposit insurance reform alone cannot solve the structural instabilities of the U.S. banking system. Deposit insurance is only one part of the federal financial safety net that undergirds the banking industry. Other elements of the safety net reinforce and enhance the perverse incentives generated by deposit insurance. Hence, policymakers cannot expect to achieve a more...

  10. 6 The Diminishing Role of Commercial Banking in the U.S. Economy
    (pp. 139-160)
    George G. Kaufman

    Commercial banking and depository institutions in general were one of the great financial innovations of all times. Indeed, it would be almost impossible to envision the modern complex economies of highly developed countries without a large and strong generic banking sector. But recent and rapid advances in technology and outmoded public policies have, on the one hand, reduced the historical comparative advantage of banks and, on the other hand, restricted the competitiveness and endangered the safety of banks. As a result, the importance of banking as an industry is being dramatically reduced. Although the longer-run implications of this erosion on...

  11. Contributors
    (pp. 161-162)
  12. Index
    (pp. 163-174)
  13. Back Matter
    (pp. 175-175)