New Book Co-Authored by Gerard Caprio Examines Causes of Recent Financial Crisis

Media contact:  Noelle Lemoine, communications assistant; tele: (413) 597-4277; email: [email protected]

WILLIAMSTOWN, Mass., March 9, 2012 – In their new book, Guardians of Finance: Making Regulators Work for Us (MIT Press, 2012), James R. Barth, Ross Levine, and Williams College Professor of Economics Gerard Caprio Jr. ’72 delve into the causes of the recent financial meltdown. They argue that the financial crisis of 2007 to 2009 was a result of “negligent homicide” on the part of regulatory officials who knew or should have known that their policies were destabilizing the financial sector. Caprio will read from the book on Tuesday, April 24, at 4 p.m. in Griffin Hall, room 3, on the Williams College campus.  The event is free and open to the public.

“[The book] tells why the Occupy Wall Street group was demonstrating on the wrong Street,” Caprio said. “Although rage at the major financial institutions is understandable, no one should have thought that the CEOs of [J.P.] Morgan or Goldman [Sachs] were working to help taxpayers. However, we all should have been expecting regulators to be working to protect society’s best interests. They did not.”

The book presents numerous instances in which both regulators in the U.S. and in other countries could have taken action to prevent or lessen the severity of the financial crisis but did not. Furthermore, the authors explain why, in many cases, these policymakers stood by their actions and even exacerbated the meltdown. “It was the same type of bias that leads sports referees and umpires to make calls in favor of the home team,” Caprio said. “The bankers are like the noisy fans sitting close to the officials, and the rest of the public is far away from the field and does not see or understand what is going on.”

Given the impossibility for the public and their representatives to gather informed and impartial assessments of financial regulation, the authors offer guidance as to how to address this systematic failure and make regulators accountable for their actions. They advocate for the creation of a new institution, called the “Sentinel,” to improve the system for selecting, deciphering, implementing, and adapting regulations. The Sentinel’s power would stem from its ability to demand information and evaluate it from the viewpoint of the public as opposed to that of the financial industry, regulators, or politicians. It would have no regulatory power, except that of reporting on what were the main risks in the financial sector and what the regulators were doing to address them.

The book “is beautifully written, and very well designed to achieve a wide audience of readers who are interested in the crisis, but are not necessarily themselves expert,” wrote Charles Goodhart, of the London School of Economics.

Barth is a scholar of finance at Auburn University and a senior finance fellow at the Miken Institute. His research centers on financial institutions and capital markets, both domestic and global, with an emphasis on regulatory issues. He received his B.S. from California State University at Sacramento in 1965 and his Ph.D. from Ohio State University in 1972.

Caprio is a professor of economics at Williams and serves as the chair of the Center for Development Economics. His research focuses on financial regulation and financial crises around the world, financial history, and economic development. He received his B.A. from Williams in 1972 and his Ph.D. from the University of Michigan in 1976.

Levine is a professor of economics and director of the William R. Rhodes Center for International Economics and Finance at Brown University. His work focuses on links among financial sector policies, the operation of financial systems, economic growth, inequality, and poverty. He received his B.A. from Cornell University in 1982 and his Ph.D. from the University of California Los Angeles in 1987.

The three also coauthored Rethinking Banking Regulation: Till Angels Govern, which was published in 2006.

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Published March 9, 2012