The Financial Crisis: Who is to Blame? by Howard Davies, polity, 229 pages
Authors quickly mastered the ability of turning dry economics into rollicking good tales of evil doings in financial markets, with bankers bring a prime target. Fortunately, among these we also have some very good books of analysis and commentary, and no lack of experts in their solution is to the malaise plaguing the global financial system
A recent latest offering is “The financial crisis: who is to blame?” by Howard Davies. Published in 2010, it has the benefit of distance, compared to many books that were rushed out to cash in on public anger at those men and women which contributed to creating financial cataclysm of 2007 and 2008.
Howard Davies is well qualified to write on the financial system, having recently been the director of the London School of Economics and Political Science and before that he had been Special Advisor to the Chancellor of the Exchequer. He was also done a stint at Treasury in the UK.
Looking at the title of the book I had an expectation that Davies would name names, and provide accounts of the villainous machinations of the men and women who created the crisis. He does not do this, and when he does refer to bankers, Davies displays characteristic British reserve describing them as “conspicuously well paid and often unappealing individuals”.
Nevertheless, most of the book rather he provides a highly readable account of the various causes, reviewing the arguments for and against each. There are the obvious targets such as under-regulation, the role of exotic derivatives and whether income inequalities played a part. In providing a list of culprits, Davies not only deals with the usual suspects, but offers up some surprises. Example he suggests the media was “watchdog that didn’t bark”, and he also cast a critical eye over business schools, which he accuses of failing to address ethics in their courses.
Each chapter is quite short, most between three and eight pages, providing a concise summary of different arguments. While Davies does occasionally offer his own opinions, the book would have benefited had the author included his own judgments on who was to blame.
The book shares the same weakness as many others on the subject in that it fails to give sufficient historical perspective to the evolution of international financial system. For example, one of its major weaknesses is the reduction in capital cushions the government requires financial institutions to have in place. This would have given many of the banks went under a better chance to have survive the ructions of the financial system. While Davies does deal with Basel, an international agreement that sets down the level in which financial institutions have to hold as capital, he fails to comment on how bankers lobbied regulators to weaken local rules that applied the Basel Accords. In the case of the US, even these watered-down rules were never fully put in place as a result of resistance from the financial lobbyists.
In presenting all sides, Davies starkly exposed as how the crisis has been translated into a battle between those who believe in the free operation of the market, and blame government interference in the housing market and overregulation for the crisis. On the other hand, we have those who claim the crisis was brought on because of the lack of regulation and the capture of politicians by bankers and other corporate interests.
This is an important debate, and rather than being an academic post-mortem, it outcome will provide a blueprint for reform and hopefully a more robust financial system. Davies, however, does not offer many solutions to the crisis, but confines his contributions to commenting on the strengths and weaknesses of different arguments.
For a quick overview of the global financial crisis, Davies’s book is well worth picking up. The copy I have is in hardback, with a price to match, and I hope the publisher plans to produce a paperback version, at a price that will make this useful book more widely available.