Book Review: The Bankers’ New Clothes: Whats Wrong with Banking and What to Do about It
by Anat Admati, Martin Hellwig
This is a must read, especially if finance is not your forte. Anat Admati and Martin Hellwig take a topic that is as equally unbearably boring as it is essential for the well-being of society, and make it understandable for the general public. That was their stated objective early in the book, and I think they accomplished that. What they reveal is not what those running the finance industry want people to understand, as it exposes alternative ways to make the finances of people whole and not just the banks. The bankers’ new clothes are fallacies and bills of goods sold to politicians and the public, and the authors rip off those false threads to expose the bankers’ beauty marks for all to see.
Among the many solutions they advocate are appropriate regulations on banks, and the enforced separation of the interests of supervisors and those financial institutions they regulate. These measures include greater equity requirements in banks before they pay out to share holders, limitations on leveraged debt, and restrictions on “innovations” such as mortgage-related securities and collateralized loan obligations to hide their true debt exposure. And perhaps (in my opinion) the sea change most needed is having banks and their officers evaluated in light of the long term benefits for the bank’s health, and claw back previous bonuses if their actions produce negative returns in future years. The short term profit motive must be removed.
We don’t need financial wizards running banks; we need competent and faithful accountants—let the über-smart people go back into science and medicine, where they belong and are the most needed.
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