A Call for Judgment

Over the weekend at the behest of Reihan Salam and Steve Teles, I read Amar Bhidé’s A Call for Judgment: Sensible Finance for a Dynamic Economy. From a progressive perspective, this is a sort of odd book. You basically get an argument familiar to the left—wiz-band modern finance isn’t actually useful, largely constitutes the shifting around of rents, and is based on gambling with taxpayer guarantees—but wrapped up in lots and lots and lots of conservative-sounding rhetoric. A liberal might make this argument with some reference to the misfortunes of workers or poor people, Bhidé instead worries that the backlash against super-rich princes of Wall Street may lead to unfair castigation of the super-rich princes of the real economy. The name “Hayek” appears over and over and over again as if repeating this incantation will trick you into not noticing that the substantive proposal at the end is for a revival of heavy-handed midcentury regulation of the financial industry.

The main prescription is essentially a new version of Glass-Steagall with the default switched around in order to make it more secure against erosion. Insured depository institutions will be given a menu of permitted functions and told they’re not allowed to do anything else. Bhidé then proves his conservative bona fides by pairing this populist suggestion with the idea that financial firms outside this sphere of guarantees should be completely deregulated, which presumably will be paired with the Ben Bernanke swearing a “cross my heart and hope to die” oath not to undertake any future bailouts.

The goal of all this is to accept that certain kinds of bubbles and manias are inevitable, but to seek to ensure that future ones play out more like the dot-com bubble rather than the deleveraging cascade of 2007-2008. The model banker is either the old-school mortgage lender who’s really asking is this guy going to pay back his debts or else the new-school venture capitalist who’s moving capital into the hands of specific entrepreneurs he has some faith in. The theme here is that the only risk-management strategy that really works is judgment and research not quantitative hedging models that Bidhé deems inherently unworkable for Taleb-like reasons.

At any rate, even though I thought the ideological self-positioning of the author got a bit annoying I do think everyone should read this book. For one thing, though Bhidé doesn’t seem super-interested in pursuing this line of inquiry, I think that if it’s correct it fills in the microfoundations missing from the argument of Hacker and Pierson’s Winner-Take-All Politics by producing a plausible account of how developments in the financial sector could produce both super-inequality and middle class stagnation through the misallocation of resources away from real economy innovators.

As with many of the better post-crisis books, I wish a bit less time had been spent on the author’s backward-looking narrative and a bit more on considering counterarguments and possible problems with his proposal. Can the government credibly withdraw guarantees from the non-bank financial sector? Isn’t this especially problematic in a political system where large legislative reforms are inevitably incremental? If it can, will the result be distorting misallocation of capital into those few fields that the newly restricted guaranteed banks are allowed to invest in? Will this proposal merely shift shady behavior into other countries while still leaving the US vulnerable to systemic risk shocks? I don’t think these are knock-down objections but they’re not totally trivial either.