Jim Barth co-authored the book Guardians of Finance, which examines events leading
up to the recent financial crisis.
The combination of misguided bank regulations and questionable enforcement practices
by regulators from 1996-2006 -- not free markets or capitalism – contributed to the
recent financial crisis. Why do we know this? Because Harbert College of Business
Lowder Eminent Scholar in Finance Jim Barth
Excerpts from Barth's co-authored book Guardians of Finance: Making Regulators Work for Us
(MIT Press) were well-positioned on pages two and three in a 97-page report presented
to Congress on July 17. Co-written by Barth, Gerard Caprio (Professor and Chair of
the Center for Development Economics at Williams College) and Ross Levine (Professor
and Director of the Rhodes Center for International Economics and Finance at Brown
University), Guardians of Finance
examines events that led to the financial crisis from 2007-2009.
The report, “Failing to End ‘Too big to fail’: An assessment of the Dodd-Frank Act
Four Years Later,” was prepared by the Republican Staff of the Committee on Financial
Services of the U.S. House of Representatives, and is an effort to prove that the
legislation enacted in 2010 which placed regulation of the nation’s financial industry
in the hands of the federal government has backfired.
One of the excerpts used from Barth’s book reads: “While it is perfectly reasonable to argue that supervision and regulation failed
to work for us, it is demonstrably wrong to contend that banks were unsupervised and
unregulated. This is important because popular accounts of the crisis erroneously
argue that the free-markets approach to regulation failed. This is not true because
we did not have free markets; there are extensive regulations in commercial banking.
It is more correct to argue that the particular mixture of extensive regulation and
enforcement actions (or lack thereof) that existed in the United States and in a number
of other countries from 1996 through 2006 failed — not that free markets or capitalism
failed to work for us.”
“Everybody likes to say that the financial crisis was caused by big financial institutions
being run by greedy individuals,” Barth said. “Our take is that the regulatory authorities
and their roles leading up to the financial crisis are often overlooked by people.”
The Congressional report claims that the Dodd-Frank Act was “based on a profound misunderstanding
of the causes of the financial crisis (2008-09) and the consequences of the government’s
bailout policy …” It also claims that regulators’ supervision failed – leading to
the financial crisis – and the Dodd-Frank Act gives them more power than ever.
Barth isn’t finished researching regulatory practices. He and his co-authors have
also proposed a new group, dubbed “The Sentinel,” be developed to monitor regulatory
agencies. Barth believes such a group should be made up of a “group of experts covering
all aspects of the financial industry with a broad range of expertise,” including
accounting, banking, finance, securities and attorneys from the financial industry.
Barth proposes the Sentinel be salaried through the Federal Reserve’s Consumer Financial
Protection Bureau, which he said would be an extremely minor cost should the Sentinel
do what was expected and prevented further financial crises, which could “have a devastating
effect on the lives of people.”
“When it (Sentinel) disagrees with what the regulatory authorities are doing -- or
are not doing – the group goes to Congress and reports on why it thinks the regulatory
authorities are taking insufficient actions to deal with financial problems or taking
actions that are leading to financial problems,” he proposed. “That would be a way
to have a check-and-balance on the regulatory authorities.
“We tend to believe that regulatory authorities tend to be biased in favor of the
institutions they regulate – not unlike sports referees who sometimes are found to
be biased in favor of the home team. For the regulatory authorities, the home team
is the institutions they regulate and the away team is the American public. They should
pay more attention to serving the interest of the public and be less inclined to favor
the regulated financial institutions.”