He applied the “Page 99 Test” to his new book, Unsettled Account: The Evolution of Banking in the Industrialized World since 1800, and reported the following:
Page 99 of my book comes in the middle of a chapter that focuses on the three main ways in which banking crises have been addressed during the past 200 years. Given that policy makers are still wrestling with these issues today, this couldn’t be more topical.Read an excerpt from Unsettled Account, and learn more about the book at the Princeton University Press website.
The oldest and, in some ways, simplest response to crisis is a bailout. Bailouts can be undertaken by the government, central bank, or by private financial institutions. Bailouts raise two important questions. First, are banks with better political connections more likely to be rescued that those that are not? Second, does bailing out a bank lead to moral hazard—that is, does it encourage other banks to undertake more risk in the belief that they too will be bailed out should the need arise?
The second form of rescue, developed in England during the nineteenth century, is that provided by a lender of last resort. Lenders of last resort extend credit to troubled banks that have credit-worthy securities to put up as collateral. Because the lender of last resort cares only about the soundness of the collateral, issues of moral hazard and favoritism are minimized.
The third form of rescue, and the most relevant for the current crisis, is what I call “more extreme measures.” Such measures range from shutting down the whole banking system temporarily, as was done in the US during the Great Depression, to bank nationalization, which has been used extensively during the most recent crisis.
Although rescues, as well as crises, merger movements, and regulatory reform (the other main themes of the book) have each been dealt with elsewhere, this book places them within a larger context by comparing the experience of many countries over a long time span. The effect, I hope, will be to shed new light on the origins of our current banking system and to help guide policy makers in shaping its future.