Things, i had that one thing. So for you maybe its five years. So im not saying its a good rule for everyone. But find that rule that you can follow for yourself and kind of stick to that and start with that. I think that bleeds over to other areas of life. And my favorite line from the book is actually you cant change the people around you, but you can change the people around you. [laughter] and so once i realized that most of my old relationships were relationships that were birthed out of proximity or convenience with history or geography. And once i realized that those people a lot of those people didnt share my similar values or beliefs. And some of them even play the victim role and i realized that victims become victimizers and i had to change a lot of the relationships in my life. I also had to reprioritize this. And so the people that are closest to you a close loved ones and usually count them on one hand or two if you are catholic. [laughter] so that is your closest relationship. The second one are people that you really love, family and etc. And the third one would be a acquaintances, coworkers, people that you care about. People that you want to be healthy and everything else. I found out that i spent all my time with the tertiary relationships and by the time that i had time for my closest relationships are my it was already gone. All the time was spent. So i had to reprioritize my time and spend it with the people that i cared about the most. So i want to Say Something before we close up here. If you get a bookfrom a make sure that you minimize it afterwards. Let me get a hug from you as well. We are bigtime huggers. They are free and transferable. Make sure that you got one from us. Okay. I did announce to turn their cell phones off. I want to thank you very much for attending the tucson festival oaks. This room is sponsored by the idea of tucson. I want to thank our two authors. This has been such a emulating conversation. [applause] [applause] a very unique presentation. I again want to think beyond the presentation, everyone was in the room who it according us, the tucson festival of books. Thank you very much and we will see you next year. [applause] thank you guys. Thank you so much. Thank you so much. Thank you a lot. Yes, we get that a lot. [laughter] that concludes booktv coverage of the 2014th tucson festival of books. We are asking the same questions ultimately. Cspan2 provides live coverage on cspan events and key Public Policy events. In every weekend, booktv. For 15 years, the only network devoted to nonfiction books and authors. These bantu is created by the cable tv industry and funded by your local cable or satellite provider. Watch this, like us on facebook and follow us on twitter. More nonfiction authors and books is booktv continues. The Banking Systems in the United States, the united kingdom, canada, mexico, and brazil, going back several decades to find out what makes Banking Systems unstable. He concluded that the deciding factor is political interference and this lasts about one hour. Hello. I am from the hoover institution. Welcome to this special edition and we are in front of a Live Audience here in front of the office area and were talking about a weekly podcast on economics. A history, psychology, sometimes daily life. You can find us on itunes and archive is at talk ort. And so today is the very fifth, 2014. My guess our Charles Calomiris and Stephen Haber. Charles is from colombia universitys graduate school of business and he codirects the Hoover Institutions regulation and rule of law research initiative. And Stephen Haber is a professor in the university at the hoover institution. Their book is fragile by design a memoir by minimalists which is our topic for todays episode. Welcome. Its great to be here. I want to start with the fundamental claim of the book. You reject the idea that being crises are a perfect storm of random events. You argue that the banking crisis is fragile by design. What you mean by that claim and what is the justification for a . So the basic idea of the book is that the Banking System is fragile by design because it is impossible to take politics out of bank regulations. And its impossible to do so because there are inherent conflicts of interest between government and Banking Systems, such that banks need governments and governments need banks. Those conflicts of interests basically boil down to three features. The first is government simultaneously regulates banks and borrow some banks. Second, governments simultaneously use their police power in order to enforce this on behalf of banks. But people who are being forced out of their houses because they have divulged default on mortgage, when banking crises occur, governments often have reasons to not enforce those contracts. Third, governments are in charge of liquidating failed banks. But the Biggest Group of creditors when a bank is liquidated or those who are voters. And so governments have incentives to change the rules that government ensures for political reasons. They will often extend beyond the statutory limits. Because of those three basic inherent conflicts of interest, it is extremely difficult to remove politics from banking. Governments have parties inside the government. Having inherent reasons for wanting to use the Banking System for their own ends. At the same time thinkers need to govern in order to do things like enforce contracts. Theres no getting this out. Books have a remarkable history of banking and the Banking Industry in five different countries. And credible work and scholarship in economic history combined with the local economy that we are talking about. Now, i would like to talk about the game of bank bargains. Can you tell us what that is and how you apply a . Became of ink bargains as a is a phrase that we invented to describe the fact that the outcome of the rules of the game of banking reflects political alliances that are formed between always involving those that are in charge of the government and some other parties that form an alliance with the government together to determine the rules of the game. So the point is that in the game of ink bargains, there is going to be a group of people who are in charge. And there are going to be a group of people who are often left out of. So it will be a big surprise to you that the people who are in charge will use their power in this to take advantage of the people who are left out. Of course they are going to be fighting among themselves for her fair share of that. Yes. And this is one site that is orton in the book. Its a little bit different from the way some political scientist think of political struggles where they tend to get struggles between political parties. One of the points that we make in the book is that the coalitions that have been involved in, lets say u. S. History, to design the rules of banking have often been bipartisan. In fact, they have purposely structured themselves to be fairly immune to electoral partisan outcomes. So just as you would expect, if you wanted to have a longlived and valuable coalition you would want it to be fairly robust with a outcomes. So sometimes you get a very unlikely partnership. People who culturally, socioeconomically, do not cii at all. But they find a convenient and being allies in a particular arrangement. The way i think of it is the democrats like to give money to their friends. They just have different friends. That they have the Financial Sector in common. So they are both content to scratch them back. I agree with you. But i would go even further to say that im times they may pretend to have different friends more than they really do. Yes. Could you give us an example . Im sure they were going to talk about the current u. S. Crisis eventually. But one of the things that i think is really into tang is that one of the contributors to the crisis was a mortgage subsidization policy in the United States. Encroachment homeownership. Yes, but encouraging it decisively in a particular way by creating this for taking the mortgage market, you can encourage this in a lot of ways. What we see is george bush followed by oquendo followed by barack obama. So even though you might think of these people as different ideologically, they are actually part of a continuous thread from the standpoint of some of these issues that we are talking about. I would add to that that in terms of the Unlikely Coalition members that sort of sit underneath these bipartisan agreements in the case of the United States, we have activist groups and thinkers through the 1990s merger movement. To the point that the Federal Reserve board hearing, activists would show up and testify on behalf of the bank of america emerging. So this is not the usual thing you would imagine an activist group taking. Do you get these very unlikely partnerships precisely because they straddle partisan lines and they were extremely durable and they made it very hard for any party to deviate from the agreement. An interesting coalition, as you pointed out. There are a lot of voters, like the homeowners. In general the democracies, some of them get treated particularly well. So i see it as somewhat cynical, somewhat realistic. They are giving money to these politically powerful groups. The realtors and the homebuilders and the banks that financed them through the political incentives. It is a part of this but did quite well. So the total amount of subsidized credit that was contractually agreed as a quid pro quo for those groups to show up, which is an understatement of the amount that they actually received, it was almost 870 billion over the period 199,222,007. Thats not chump change. Right, i think we better do a little bit of clarifying. You are talking about the investment act, which im going to push back a little bit when we get to it in detail. We should just mention that a lot of people who live in us were playing a role in the 2000 and financial crisis and they get challenged and say that was passed in 1977. But really only it really only took place in the early 1990s when it became the determinant of whether banks are merged or not. Thats when it started to happen this way. So i just wanted to get that straight. Lets go back into history a little bit and we will start with the United States. I wish we had a five or six hour time frame. That we honestly dont. And so were not going to be able to cover all of these asked back of the book. The lets start with the u. S. Going back into the history of the United States. You talk about 19th century as a particular era of banking in the United States. Can you tell us why the u. S. Was upon the crisis . A lot of people say oh, my goodness. It was crisis after a failure and why is the u. S. So unstable and that era . Okay, first of all im appalled and shocked that we dont have the. But second is to answer you more specifically. U. S. In the 19th century has a Banking Structure unlike any country in the planet. It has thousands of banks. Tens of thousands which are, in most states, unable to open branches. So every bank is what we think of as a branch of the bank unto itself. That means in the event of this its very hard to move funds from one to the other. It means you cant spread risks across regions. The you are tied to the local economy. And it meant that banks could not capture scale economies and so the banks are very inefficient. Olivas things seem pretty obvious. That they are inefficient. Theyre stuck with local economy. Why . Is a political deal that sony does. And just let this like this we were talking about the coalition between populist and megabankers in the 1990s and early 2000. Theres a coalition between small bankers and farmers in the 19th century. What their concern is his to give credit to Small Farmers and Small Farmers that are opposed to big city aristocrats or big city people. And so you get an alliance of small bankers and farmers, most particularly and famously is the unraveling of the bank of the United States very first in 1811. And as we found as the government realizes that it needs best, get unraveled again during the jacksonian period. And so in order to make sure the banks would not have to base competition in the market, and the early years of bank regulation, in most states is that they made it illegal for them to branch into your state, meaning a bank from rhode island couldnt branch into massachusetts. They also made it illegal for banks open a branch. So most states have laws that precluded Branch Banking and the point that we make in the book and the take away of this is that im sure someone can write down an economic model that you could write him lots of models. But this is clearly a political arrangement. No efficiency or stability criteria. But it did work quite well for local unit makers because they had captive local markets with local monopolies trade and it worked well for relatively prosperous farmers in a particular community because they give it back banquettes went to them and no one else because the cost of gathering information at a distance even up until the 1990s, most of it was local. Really until the computer revolution. So that created a sort of cozy arrangement. Good for local farmers and bad for anybody else who wanted access to this is bad for the system as a whole because every decade there is a banking crisis. Its hard to remember in a world where we live and work alder culture is 2 . In 1900 it was about 40 . So its about a very important factor was going to be politically powerful in the region. And as we go forward continually through the 20th century and starting at the end of the 19th century. It becomes less and less important as an economic factor. So i do not coalition unravel and so what explains why did it unravel and why did it not unravels . Well, first of which emphasized how striking it is that lasted for about 150 years. So many things, lots of shocking thing. Two world wars, you Great Depression. A lot of banking crises during the late 19th and early 20th century. Even the savings and loan crisis which finally contributed towards its demise. But if what is interesting is over 150 years of turmoil and inefficiency, it persisted. Part of the story is starting from the very beginning that states had authority over the deciding rules of engagement for banking and what they were going to be within their states and also they had the authority with them to participate. So that meant that if you are in kansas or illinois or many other such states, if the agricultural interest there wanted to maintain this, they just had to win the battle at the state level. So it was a lot easier for those interest to women at the 50 state levels that wouldve been a day have had to buy that bottle on a centralized basis can we make that argument that argument from the link and especially at the individual bank leveler level. Suddenly create doesnt sound like something that the federal government owing to do that couldve been a nationwide banking unlike the bank of the United States. But what has happened is congress probably wouldve not let the comptroller decide differently. But they decided that they had to be this as well. One building, basically. Right. So the National Banks were like out in the middle of nowhere. And that was a. In the charters were the same. They were operating under the same rules under the same authority under the same supervisory authority. They were cheese and talk. And as steve pointed out earlier, very particular risks that they couldnt diversify across regions. So the u. S. Was as everyone understood and they are saying what ridiculous Banking System these people have read like the little gold decisionmaking that was so fragmented. In the central bank of the United States as well, bankers, they get greedy and they get to the point where they dont want to clean up the mess. And the fed was politically a way to mitigate some of the worst effects of the system and keep it going longer than would have or it is that correct . You might guess, that is correct. Whats interesting is that it has to be part of a reaction and there is a National Monetary condition we are creating into the Banking System. One option that they had, they studied it. And im quite aware of what the other models were. And they rejected all these other models in favor of retaining unit banking and propping it up by creating 12 regional fed banks that could essentially link them to the unit banks by increasing liquidity in times of crisis. Essentially a safety net for them. Just read and i point out the same thing happens in the Great Depression. Im sure everyone remembers the High School Test textbook which talks about the Banking System and creating this as well. And to what they dont number is its not your textbook. [applause] yes. It was actually in their. Did you do on that exam . I did. When my daughter took it, i panicked because i thought that im going to her my daughters chances. I had a different perspective. I usually try to help my daughter. So my daughters decided her father doesnt know how to write. [laughter] and theyre probably right. In any case in the Great Depression not only did my forebears also understand this, but the response was again to prop up the unit of the Banking System. In order to prevent the consolidation of banks especially when we cap on checking and savings accounts. Its all done to discourage and so are want to drive across your and it is what drives that position. Fdr was against it.