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.
My book synthesizes and extends skeptical writings about modern finance (but not from the fashionable ‘behavioral’ point of view) going back to the early 1990s. In reverse chronological order they include:
Let Bankers Be Bankers, Forbes, September 2009
In Praise of Primitive Finance, The Economists’ Voice, February 2009
How Banking Diversification Steered us Wrong, BusinessWeek, February 9 2009
Insiders and Outsiders, Forbes.com, September 2008
Accident Waiting to Happen, September 2008
“Fair Stock Markets: The Hidden Cost,” The New York Times, January 22, 1995.
“High cost of liquidity,” Financial Times, December 13, 1994
“Efficient Markets, Deficient Governance,” Harvard Business Review, November-December 1994.
“The hidden costs of investor protection: lessons from the US,” Royal Society of Arts Journal, July 1994
“Return to Judgment,” Journal of Portfolio Management, Winter 1994.
“The Hidden Costs of Stock Market Liquidity,” Journal of Financial Economics, V 34, 1993: pp. 31-51
“The Causes and Consequences of Hostile Takeovers,” Journal of Applied Corporate Finance, V 2, N 2: pp. 36-59, Summer 1989.
Preface and Introduction
Part 1. Ordering the Innovation Game: Beyond Decentralization and Prices
1. The Decentralization of Judgment
2. The Halfway House: Coordination through Organizational Authority
3. Dialogue and Relationships
4. Reflections in the Financial Mirror
Part 2: Why it Became So
5. All-Knowing Beings
6. Judgment-Free Finance
7. Storming the Derivative Front
8. Liquid Markets, Deficient Governance
9. Financiers Unfettered
10. The Long Slog to Stable Banking
11. Not There Yet
12. Finally on Track
13. Derailed By Deregulation
14. Restoring Real Finance
Instituto Bruno Leoni
“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 Phelps, 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 McCraw, Pulitzer Prize winner in History
“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 Nelson, co-author, An Evolutionary Theory of Economic Change and Honda prize winner