|Editor(s):||Hollow, Matthew |
|Reviewer(s):||Moen, Jon |
Published by EH.Net (October 2016)
Matthew Hollow, Folarin Akinbami, and Ranald Michie, editors, Complexity and Crisis in the Financial System: Critical Perspectives on the Evolution of American and British Banking. Cheltenham UK: Edward Elgar, 2016. xv + 339 pp. $145 (cloth), ISBN: 978-1-78347-132-4.
Reviewed for EH.Net by Jon Moen, Department of Economics, University of Mississippi.
Complexity and Crisis is a set of thirteen essays aimed at providing insight into the causes of the 2008 financial crisis. Most have a strong historical element to them. They examine the financial and banking systems of the United Kingdom and the United States, comparing responses to crises in the past. The essays are drawn from several disciplines including economics, law, and management. The theme that ties this set together is the role of increasing complexity in contributing to financial crises today and in the past. The definition of complexity is elusive, although lack of transparency about financial instruments or intermediaries certainly contributes. One example presented early on is that of the complex financial derivatives that collapsed during the 2008 crisis. Other examples include innovations in financial markets that lead to unexpected connections with other intermediaries that in turn create confusion or uncertainty among participants leading to a crisis.
The book is organized into three sections. The first describes the long run, historical growth of the U.S. and UK banking systems. This section contains four mainly historical essays, two that compare different financial and banking crises and two that look at the growth and development of the British banking system since 1688. The second section looks at how legislation and market pressures changed the financial structures of the two countries. It contains five essays that look at how legal decisions and legislative changes altered the location of liability in financial markets and the structure of corporate governance in financial firms. The third section focuses on how financial crises can be dealt with while they are unfolding and what could be done in the aftermath of a crisis. The four essays in this section look at how the governments of the UK and the U.S changed their responses to crises and what might be some new ways to respond to the inevitable crises in the future.
This is a well-done set of essays. Although they are arranged somewhat thematically, they can be read in no particular order or even independently. The book, therefore, can also serve as a useful reference book for those studying more historical aspects of banking and financial markets. A majority of the essays focus on the UK; only three examine the U.S. exclusively. This is not really a weakness, as this a useful set of essays to have as most are heavily documented, further enhancing its use as a reference volume.
The theme of complexity and its connections to crises is interesting, although it is not really needed to appreciate any of the essays. I think there could have been more comparative analysis across various crises because the relative simplicity of earlier crises and panics helps us understand current problems. Increasing complexity does not rule out seeing parallels across episodes of financial crisis. The Panic of 1907 and the Crisis of 2008 contains some striking similarities once you get past the complex surface of 2008. In both cases short-term lending was disrupted, intermediaries outside the purview of the lender of last resort were the hotspots in both crises, and regulatory response — or lack thereof in the case of Knickerbocker Trust and Lehman brothers — featured prominently in both crises. My work and that of Gary Gorton address these parallels. The place of intermediaries being “too big to fail” also is absent in the book, although that was a concern in the past just as it has been currently. An essay on that topic would have added a great deal.
Several of the essays caught my attention, in part because they relate to my own research or they demonstrate comparative analysis across panics. The first chapter (by Robert Bruner, Sean Carr, and Asif Mehedi) examines six panics from U.S. history, highlighting the presence of financial innovation in each crisis and its contribution to complexity in financial markets. I suspect that innovation was in part spurred as a means to get around new regulations in addition to new profit opportunities. The third chapter (by Ranald Michie) shows how the evolution of the U.K. financial system was more likely to be guided by internal, market-based responses to crises while the U.S. system was more likely to be changed by outside legislative changes. As he points out, such legislative changes likely will be followed up with innovations around the legislation, producing unintended consequences in the future. Chapter five by (Dalia Mitchell) and chapter eleven (by T.T. Arvind, Joanna Gray and Sarah Wilson) taken together provide a nice comparison of the evolution of how legal liability was assigned in the U.S. and the UK over time. There seems to have been a shift away from interpreting losses as a sign of criminal behavior on the part of directors towards one based more on interpreting losses as a result of market vicissitudes and bad decision making. This is a theme that appeared during the examination of the crisis of 2008, one that blamed much of the crisis on the fact that the incorporated investment firms that had supplanted partnerships had much less “skin in the game.” The result was that corporate firms took on more risk. The remaining chapters are all worth reading, and most of you will select a unique set that appeals to your interests.
Jon Moen is Chair and Associate Professor in the Economics Department at the University of Mississippi. He has studied the Bank Panic of 1907 and its role in the founding of the Federal Reserve System. He currently is examining the limited role of the New York Clearing House as a lender of last during the National Banking Era.
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|Subject(s):||Financial Markets, Financial Institutions, and Monetary History|
|Time Period(s):||17th Century|
20th Century: Pre WWII
20th Century: WWII and post-WWII