Readers interested in John Allison’s appearance at Trump Tower may also be interested in Arnold Kling’s review of Allison’s book, The Financial Crisis and the Free Market Cure, which appeared in the October 2012 issue of Reason Papers.
When it comes to the financial crisis of 2008, the conventional view seriously under-estimates the extent to which collectivization of financial risk was the cause of the problem and seriously over-estimates the extent to which strengthening this collectivization represents a long-term solution. I am in complete accord with Allison on that score. However, I do not share his view that there is a free market “cure.” At best, there are movements in the direction of the free market that would reduce the costs of regulation without increasing the risks of another meltdown. However, such changes will not be made as long as the conventional history of the crisis—which treats it as resulting from the loss of will to regulate—holds sway. And I do not believe that, in the end, Allison’s book will have much of an impact on converting those who hold the conventional view.
Read the whole thing here (4 page PDF).
H/t: Alison Bowles (for the WSJ article)
His article on financial regulation and the analogy to chess is pretty insightful here:
On free market banking there are two excellent examples of how such can taker place, both covered in some detail in Fragile by Design: The Political Origins of Banking Crises and Scarce Credit which is an excellent book I’d recommend
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I recommend another book regarding the cause of the financial crisis of 2007-8. It is Hidden in Plain Sight, written by Peter J. Wallison, who was a dissenting member of the Financial Crisis Inquiry Commission. He makes the case that the primary causes were the US Department of Housing and Urban Development (HUD), Fannie Mae, and Freddie Mac. HUD’s affordable housing goal — increased over time — was intended to make it easier for medium and lower income people to get a mortgage and buy a home. HUD pursued its goal by pushing weaker mortgage underwriting standards. Fannie Mae and Freddie Mac led the way implementing weaker mortgage underwriting standards. Allison’s book cites misregulation as the cause and identifies HUD’s affordable housing efforts, but doesn’t cover HUD very much.
Incidentally, John Allison was on Trump’s short list for Treasury Secretary. Trump picked somebody else, but Allison is on Trump’s short list for Federal Reserve vice chairman in charge of bank oversight.
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Well, since we’re in book recommendation mode, I may as well recommend the work of Jeffrey Friedman and his colleagues. There’s What Caused the Financial Crisis and there’s Engineering the Financial Crisis. We ran a review of the former in the same October 2012 issue of Reason Papers (8 page PDF), but unfortunately never ran a review of the latter. The only other piece we ran on the financial crisis was a 2014 review of Gretchen Morganson and Joshua Rosner’s Reckless Endangerment, by Will Thomas (5 page PDF). Hogan’s review of Friedman’s book is mostly just expository, but Thomas’s review is somewhat critical of Morganson-Rosner. I kind of wish that we’d stayed more on top of the literature on the financial crisis, but I guess we didn’t.
Thanks for the reference to the Friedman books and the Reason Papers book review. I know I read Engineering the Financial Crisis. I may have read parts of the book reviewed. Two chapters were written by Peter Wallison, the author of Hidden in Plain Sight that I recommended. One of those chapters says the crisis had its roots in the U.S. government’s efforts to increase home ownership, especially among minority, low-income, and other underserved groups, which is the main theme of Hidden in Plain Sight. The review also says “Wallison concedes that CRA loans did not lead to higher default rates.” I believe Hidden in Plain Sight indicates the opposite. Indeed, it presents a lot of data about how high default rates were on Fannie’s and Freddie’s subprime credits. Of course, What Caused the Financial Crisis was published Dec. 2010, and Hidden in Plain Sight in Jan. 2015. So Wallison had much more data for the latter.