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A Call for Judgment: Sensible Finance for a Dynamic Economy 1st Edition

by Amar Bhide (Author)
4.8 4.8 out of 5 stars 9 ratings
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Our prosperity requires the enterprise of innumerable individuals and businesses who exercise their imagination and judgment-and bear responsibility for outcomes. And widespread enterprise is fostered through dialogue and relationships, not merely prices in anonymous markets. Yet modern finance blatantly neglects these necessary elements for enterprise. In the last several decades finance has become increasingly centralized, distanced, and mechanistic. Instead of many lending officers making judgments about borrowers they know, credit decisions are the output of the models of a few Wall Street wizards and credit agencies. This robotic centralized finance stifles the dynamism of the real economy and leads to recurring collapses.

A Call for Judgment clearly explains how bad theories and mis-regulation have caused a dangerous divergence between the real economy and finance. In simple language Bhidé takes apart the so-called advances in modern finance, showing how backward-looking, top-down models were used to mass-produce toxic products. Thanks to excessively tight securities laws and loose banking laws, anonymous transactions have displaced relationship-based finance. And Bhidé offers, tough simple rules for restoring relationships and case-by-case judgment: limit banks--and all deposit taking institutions--to basic lending and nothing else.

A Call for Judgment is both a primer on the role of finance in a dynamic modern economy, and a cautionary tale about the pitfalls of banks functioning as highly centralized, mechanistic entities. It is essential reading for anyone interested in bringing the economy back to a point at which decisions can be made that foster organic economic growth without the potentially disastrous risks currently accepted by modern finance.
Previous page
  1. ISBN-10
    0199756074
  2. ISBN-13
    978-0199756070
  3. Edition
    1st
  4. Publisher
    Oxford University Press
  5. Publication date
    October 7, 2010
  6. Language
    English
  7. Dimensions
    0.96 x 9.78 x 11.28 inches
  8. Print length
    368 pages
  9. See all details
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Editorial Reviews

Review

"Events have raised large questions about the academic theories supporting the concept that our heavily 'engineered' financial markets are self-disciplined and efficiently allocate capital. Amar Bhidé's skeptical analysis should stimulate basic reconsideration."--Paul Volcker, chairman of the Economic Recovery Advisory Board and former chairman of the Federal Reserve

"This great book, Amar Bhidé's third in a decade, is an essential and distinct contribution in our hour of need. It first reformulates how modern capitalism does what it does best--innovation. Then, in high gear, it shows us how our capitalism has been brought down by a thousand cuts: the idea that rational investors always know precisely what they're doing, the perversion of the banking industry, the errors of deregulation and the striking errors in some new regulations. A Call for Judgment is not a cry for some auto da fé on Wall Street but rather a brilliant and reasoned plea for a basic revamp of our capitalist institutions so as to regain the dynamism of old."--Edmund S. Phelps, McVickar Professor of Political Economy and Director of the Center on Capitalism and Society, Columbia University, and 2006 Nobel laureate in Economics

"A Call for Judgment is an intellectual firecracker--full of wisdom, common sense, and hard-hitting reform proposals. Few other writers, if any, can match Amar Bhidé's deep knowledge of economic theory and historical detail with his first-hand experience in both entrepreneurship and real-world finance. It's hard to imagine a more useful analysis or guide for what must now be done."--Thomas K. McCraw, Straus Professor of Business History, Emeritus, Harvard Business School, author of Prophet of Innovation: Joseph Schumpeter and Creative Destruction

"A Call for Judgment presents many interesting insights on necessary innovations in the world of today and tomorrow. Amar Bhidé prompts also some conclusions for improving the rules and ways for future banking-supervision in the United States. This book is a very positive contribution to a necessary debate."--Hans Tietmeyer, former president, Deutsche Bundesbank

"Amar Bhidé's analysis of the economic crisis that exploded on us a few years ago is extremely informative and thought provoking. He writes from an experience both in business, where he could see what was going on around him, and in academia, where he has had the time to study and reflect on what happened and why. Bhidé's discussion of what we need to do to avoid a recurrence is illuminating and persuasive."--Richard R. Nelson, George Blumenthal Professor of International and Public Affairs, Business, and Law, Emeritus, Columbia University and winner of the 2006 Honda Prize and co-author of An Evolutionary Theory of Economic Change

Book Description

Award-winning author Amar Bhidé examines the breakdown between the financial sector and the "real economy"--and how it can be fixed to spur recovery

Product details

  • Publisher ‏ : ‎ Oxford University Press; 1st edition (October 7, 2010)
  • Language ‏ : ‎ English
  • Hardcover ‏ : ‎ 368 pages
  • ISBN-10 ‏ : ‎ 0199756074
  • ISBN-13 ‏ : ‎ 978-0199756070
  • Item Weight ‏ : ‎ 1.42 pounds
  • Dimensions ‏ : ‎ 0.96 x 9.78 x 11.28 inches
  • Customer Reviews:
    4.8 4.8 out of 5 stars 9 ratings

About the author

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Amar Bhide

Amar Bhide
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Amar Bhidé, Schmidheiny Professor at the Fletcher School, has served as Glaubinger Professor of Business at Columbia University, a consultant at McKinsey & Company and a proprietary trader at E.F. Hutton. Bhidé is a founding member of the Center on Capitalism and Society, editor of Capitalism and Society, and has written about the financial crisis in the Wall Street Journal, Business Week, and Forbes.

Customer reviews

4.8 out of 5 stars
4.8 out of 5
9 global ratings

Top reviews from the United States

Solitude
5.0 out of 5 stars An oldie but a goodie
Reviewed in the United States on June 5, 2013
Verified Purchase
Amar is an old friend of mine and I read his book knowing his deep knowledge about economics. This is an intelligent read for the hyper-intellectual. Nearly everyone else has written what I would say so I'll save you the time from reading more.
Just buy this book, you won't regret it.
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5.0 out of 5 stars Five Stars
Reviewed in the United States on February 9, 2017
Verified Purchase
Interesting. Book very well written
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Mark Calabria
4.0 out of 5 stars Can We Really Go Back to Old Style Banking?
Reviewed in the United States on January 28, 2015
Sometimes, great insights come from those outside a field. Fletcher School professor Amar Bhide's prior writings have been on innovation and entrepreneurship. The strength of A Call for Judgment is in bringing insights from those fields to the financial crisis. Its weakness lies in its lack of grounding in banking regulation.

Bhide begins by noting that finance differs in significant ways from other industries. Non-financial companies tend to be interconnected and personal, rather than anonymous and commoditized, as are financial and textbook capitalism. But drawing on the seminal work of F.A. Hayek, among others, Bhide also notes that well-functioning markets tend to be characterized by decentralized knowledge.

His core insight, which is absolutely correct, is that the replacement of ongoing personal relationships in banking with securitized arm's-length dealing, has increased systemic risk by furthering centralization and reducing the quality of knowledge and monitoring. In discussing how finance evolved in this direction, Bhide recounts how various theories, such as the efficient market hypothesis and Black-Scholes-Merton options pricing, paved the way for the abandonment of relationship banking.

The book also focuses on the role of our securities laws, starting with the 1933 and 1934 Securities Acts. In protecting the small investor and increasing the liquidity of the equity markets, these laws have promoted a diffused ownership of public companies that has also discouraged investors from establishing relationships with management.

Where A Call for Judgment falls short is in its recommendations for reform. Bhide offers one proposal: Return to narrow, "old-fashioned" banking, in which bankers know their borrowers. This would be accomplished by essentially reinstating the Glass-Steagall Act of 1933 and limiting banks to making loans to individuals and non-financial businesses.

But this proposal and its implications aren't really explored; nor is the academic literature on universal banking examined. There is literature suggesting that the more activities banks engage in, the more stable the banking system is. There is also empirical research suggesting that Glass-Steagall was misguided. Universal banks in the 1920s performed better than narrow commercial banks, and the securities underwritten by universal banks also performed better than those by narrow investment banks. Nor is there any discussion of the European experience with universal banking, often practiced in a personal and interconnected manner.

Amar Bhide has written a valuable contribution to our understanding of financial markets. Unfortunately, however, it offers only a narrow analysis of the financial crisis with an equally narrow reform proposal.
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Pradeep Anand
5.0 out of 5 stars Objective and expansive view financial meltdown
Reviewed in the United States on September 30, 2010
Since October 2008, many have written about the financial meltdown that sparked the Great Recession. Most books and articles were about "what" happened; very few attempted to write about "why" it happened.

These "what" and "why" attempts informed me but I learned little to draw lessons for corrective actions and for the future. These authors were like the proverbial blind men trying to describe the elephant by touching/feeling its different parts. Additionally these authors were academicians, journalists and financial engineers who wrote from limited perspectives of their own domain expertise or experience, mostly in finance, economics and financial journalism. These authors provided subjective views of a vested or inadvertent participant in the creation of the financial bubble.

I needed a detailed, objective view to learn about why financial meltdown came about and how it could be avoided in the future. Amar Bhidé's Call for Judgment went a long way in satiating that thirst.

Amar Bhidé is Schmidheiny Professor at Fletcher School, and has served as Glaubinger Professor of Business at Columbia University. His book is expansive in its scope.

It has broad content, drawing from scholarship and research in Economics, Finance, Government Regulation, Quantitative Sciences, and Innovation. Bhidé uses his deep knowledge of theory and practice in these seemingly disconnected disciplines to support and tear apart deeply rooted contentions and practices.

Additionally, it is expansive in its time horizons. Bhidé is a credible business researcher and historian. He goes as far back as is necessary, sometimes several centuries, to provide details that evolved and contributed to our current situation. It reveals human frailties, how our collective memories can also diminish with age.
Moreover, Bhidé is objective. He displays not only intellectual honesty but also intellectual bravery. He is not afraid to take on some of the sacred idols and expose their contributions to current debacle.
Furthermore, he is not scared of the devil that resides in the details. His approach has logical and systematic rigor.

Bhidé contends that there were several contributors to the debacle. At the top of his list is that Finance had become centralized, mechanistic and detached from its local customers and conditions. Flawed quant models catalyzed centralized decision-making, with microscopic contributions from local judgment.
The centerpiece of this centralized financial decision-making had some fundamental faults in the way their "mathematical economics" foundation and pillars treated "risk" and Knightian "uncertainty". Pursuit of mathematical elegance required some shortcuts that took economics into untestable territories, where hypotheses were unfalsifiable but implausible, with unimagined consequences.

Separately, banking deregulation, cheered on by prevailing economic theories and certifications from the SEC, allowed banks and investment firms to morph into publicly traded monoliths. These firms were led by inactive, arms-length stockholders management, who paid little attention to increasing risk at their firms. This led to a perverse "Heads we win, tails public stockholders lose" attitude to prevail in the industry. The risk appetite of financial firms went up and with it the share of trading at these firms.

On the other side, threatened banks, whose market share had declined, were now forced to look for alternative sources of profits. They created highly profitable and risky products such as derivatives and Credit Default Swaps.
Aided by these factors, the imprudence or chicanery of a few individuals unraveled several firms and caused widespread damage to the global economy

Bhidé has "A Modest Proposal" to pull us out of this morass. It can be summarized by former Citibank CEO John Reed's comment, "I would compartmentalize the industry for the same reason we compartmentalize ships. If you have a leak, the leak doesn't spread and sink the whole vessel."
He recommends that we reinstate Glass-Steagall's wall between investment and commercial banking, to reduce collateral damage from future speculative bubbles.

His fervor for local touch points between banks and borrowers is not lost. He recommends that we reinstate old-fashioned banking where bankers know their customers. Consequently, we would have to decentralize oversight of banking and finance so that conditions, relations and decision-making can be monitored locally.

His proposal allows "casino bankers" (investment firms) to innovate and speculate but with an arm's length from "utility banks".

Bhidé does anticipate that the unwinding and fragmentation of megabanks will be difficult--97% of more than $200 Trillion in derivatives are held by five US banks: J.P Morgan, Bank of America, Goldman Sachs, Citibank and Wells Fargo.

Additionally, government-led solutions to the current crisis may take a long time. The 2,300-page Dodd-Frank bill may appear to some as "refurbishing regulators' deck chairs from the Titanic." However, as historical examples from previous financial crises show, "a weak first bill doesn't have to be the last word" and "reform delayed isn't reform denied!"

I could see why eminent people such as Former Fed Chairman Paul Volcker and Nobel Laureate (Economics) Edmund Phelps and many others recommended the book. A Call to Judgment has great content and is a treat to read. The material, in lesser hands, could have been boring and tedious. Bhidé strikes a great balance between dryness of the subject and popular writing, with subtle, tongue-in-cheek strokes that are rare in such scholarly tomes.

Amar Bhidé's A Call for Judgment is a clarion call for us to be aware and beware of the current structure of the financial--banking and investment--industry. Global governments and investors need to listen to Bhidé and heed his call to action because we are not out of the woods yet.

The insightful book has probably been targeted at researchers, scholars and policy wonks but the rest of us can benefit from this brilliant work too. I know I did.
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