Blame game

As befits a man who won the Nobel prize for his work on asymmetric information,Mr Stiglitz dwells on the market imperfections and misaligned incentives that distorted decisions made by everyone from mortgage originators to credit-rating agencies. His depiction of finance8217;s failures is not novel,but it is well done.

Far less convincing are Mr Stiglitz8217;s sweeping,often vitriolic,criticisms of the flawed policy response. These include an attack on the fiscal stimulus where,he says,the Obama team failed to draw on theory,empirical evidence and common sense and on the bank rescue plan,which he describes as among the most costly mistakes of any government at any time. This blanket condemnation is not supported by the facts and undermines the book8217;s broader thesis. Freefall is,in essence,a call for stronger government to combat all the market failures that Mr Stiglitz sees in modern financial capitalism.

Mr Stiglitz argues that finance needs some structural change the too-big-to-fail banks need to be broken up and more and better regulation. After he has condemned today8217;s policymakers so roundly as incompetent and beholden to special interests,that prescription,and the author8217;s broader faith in government activism,sounds perverse. If policymakers failed as miserably as Mr Stiglitz believes,then he ought to be far more worried about the potential for government failure in the future. That dissonance is a glaring weakness in Mr Stiglitz8217;s book.

13 Bankers,which Mr Johnson co-wrote with James Kwak,a former McKinsey consultant,makes a narrower point,but has greater historical sweep and is the better read. The authors argument,first laid out in the Atlantic a year ago,is that America8217;s big banks act as an oligarchy,a group that has gained political power because of its economic power and then uses that political power for its own benefit.

Unlike oligarchs in emerging economies,Wall Street8217;s financiers do not use overt bribery or blackmail. Their tools are the soft power of campaign-finance contributions,the revolving door of jobs in government and on Wall Street,and the creation of a culture that equated Wall Street8217;s gain with America8217;s gain. But they are no less nefarious. Their power,the authors argue,explains why the Obama team chose the blank cheque option for dealing with the financial crisis.

To ensure the safety of the financial system and America8217;s democracy these behemoths must be broken up. The authors would like to limit the assets of any financial institution to 4 per cent of GDP and those of each investment bank to 2 per cent. That would mean dismantling six monster banks.

Suspicion of a financial oligarchy is a recurrent theme in America. From the fights between Thomas Jefferson and Alexander Hamilton over the Bank of the United States to Franklin Roosevelt8217;s Depression-era refashioning of finance,America has oscillated between admiration for and fear of bankers; between welcoming financial consolidation and preferring fragmentation. Messrs Johnson and Kwak deftly summarise this history before moving on to their description of how modern Wall Street 8212; the most powerful and concentrated financial sector in the country8217;s history both created the financial crisis and ensured a bail-out for its own benefit.

Like most conspiracy stories,13 Bankers contains a kernel of truth. Wall Street8217;s intellectual and political clout is considerable,and financial firms make far bigger campaign donations than any other industry in America,resulting in an unusual cosiness between financiers and Washington8217;s policy elite. That doubtless influenced the financial deregulation that preceded the crisis,helped shape the response and is plainly influencing post-crisis efforts at regulatory reform.

But,like many conspiracy theories,13 Bankers goes too far. It ignores evidence and arguments that do not suit its thesis. The Obama administration8217;s decision not to nationalise the banks is presented as prima facie evidence of the oligarchs8217; power. The notion that there could also be some downsides to a wholesale government takeover of America8217;s big banks is given short shrift.

The authors argue that the banks8217; oligarchic power stems from the size and concentration of American finance. No mention is made of the fact that America8217;s banking system is both less concentrated and smaller in relation to the economy than those of many other industrialised countries. Or that some of the most effective bank lobbying,for instance against a new consumer watchdog for financial products,has been by small community banks rather than Wall Street behemoths.

A broader perspective would have led to more nuanced conclusions. The origins of America8217;s financial oligarchy,for instance,might have more to do with campaign-finance rules and political appointees than banks8217; size. The faith that Messrs Johnson and Kwak put in merely capping the size of banks is misplaced. The trouble is that such nuanced arguments would spoil the tale of villainy in 13 Bankers. Their absence results in a book that is too crude to be convincing.