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A Call for Judgment
Book

A Call for Judgment

Sensible Finance for a Dynamic Economy

Amar Bhidé
Oxford UP, 2010

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Editorial Rating

8

Qualities

  • Controversial
  • Analytical
  • Background

Recommendation

Decentralized decision making is essential to capitalism. Entrepreneurial inspiration and innovation can advance society faster than the slow march of a centralized, government-planned economy. But like government bureaucracies that become unmanageably large, oversized banks also can impede progress. Simply allowing market forces to determine the size and scope of the big banks is debatable public policy, but bank mergers have led to centralization and to the mechanization of lending, thus adding systemic risk to the US banking system. This far-reaching book includes a rich history of this industry’s development and a detailed account of its destabilizing role in the 2008 financial panic. Amar Bhidé – a business professor and a trader –describes more than he prescribes, and his prescription is as controversial as it is compact: Limit severely what banks can do. getAbstract recommends the book to readers seeking a deeper understanding of how financial institutions drive, and sometimes derail, the entire economy.

Summary

The Need for Banking Reform

In the global financial panic of 2008, many banks stopped doing business with each other due to widespread doubt about their heavy investments in mortgage-backed securities. Banks and other worldwide financial intermediaries bought piles of US mortgage-backed securities until housing’s hyperactive growth began to dwindle in 2006-07. These securities started shrinking in value as defaults degraded the underlying pools of loans, many of them high-risk and subprime.

The mortgage meltdown provided little evidence that capitalism is fundamentally flawed, or in need of broad reform or replacement. Rather, the 2008 panic forcefully demonstrated a narrower need for regulatory reforms to make banking and investment more supportive of companies in the real, or nonfinancial, part of the economy. The most pressing regulatory need is to limit the scope of diverse businesses that banks can conduct.

Bank mergers spread as the industry tried to achieve efficiencies of scale and cost like other consolidated industries. Banks also enlarged their scope to include more wealth management and securities trading work. This consolidation centralized the extension...

About the Author

Amar Bhidé has served as a professor of business at Columbia University, a consultant at McKinsey & Company and a proprietary trader at investment firm E.F. Hutton.

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