After the Fall

New
Hardcover
2010
$17.15

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.

Synopsis

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.

$17.15

Save:$0.54 (3%)

Quantity

Temporarily out of stock

More Information

Format: Hardcover
Pages: 250
Publisher: Encounter Books
Published: 07 Jan 2010
ISBN 10: 1594032610
ISBN 13: 9781594032615

Media Reviews

When it comes to our flawed financial system, most writers generally lob big bombs and hope for, at best, maximum splatter. Nicole Gelinas by contrast sends a precision missile that neatly and elegantly takes the thing to pieces--and lays the ground for a better structure. Hail Gelinas. -- Amity Shlaes, Senior Fellow, Council on Foreign Relations and author of The Forgotten Man: A New History of the Great Depression A powerful analysis of how the too-big-to fail policy has undermined public trust in markets. -- Luigi Zingales, Robert C. McCormack Professor of Entrepreneurship and Finance, University of Chicago-Booth School of Business and author of Saving Capitalism from the Capitalists Nicole Gelinas has done the country a great favor by explaining concisely and cogently the origins of the financial crisis of 2008 and how--if we have the political will--we can avoid a repeat in the future. After the Fall is an instant classic that should be required reading in both Washington, D.C. and Wall Street. -- John Steele Gordon, author of An Empire of Wealth: The Epic History of American Economic Power Nicole Gelinas has written a fine book about the long prehistory of financial catastrophes that culminated in the extraordinary collapse of the banking industry in September of 2008. The book is lucid and sober, simple but not simplistic, and essential background to understanding the inherent vulnerabilities of modern finance. -- Richard A. Posner, U.S. Circuit Judge and author of A Failure of Capitalism: The Crisis of '08 and the Descent into Depression

Author Bio

Nicole Gelinas, a Chartered Financial Analyst (CFA) charterholder, is a Manhattan Institute senior fellow and contributing editor to City Journal. She lives in New York City.