Book review
Restoring Financial Stability: How to Repair a Failed System
Viral Acharya and Matthew Richardson (Editors), New York University Stern School of Business, 2009.
reviewed by Editor-in-Chief Lars Bjørn Falkenberg
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From different angles, investment managers, scholars and private citizens have witnessed and felt the effects of the financial crisis which began unfolding in 2007. We have seen how the turmoil has completely changed our economies and financial systems. Grimly, we have followed the news about banks collapsing as well as political steps for action and government rescue packages.
All agree that it is critical to consider what action is required to reduce the damage entailed. Likewise, we recognise the importance of finding ways of preventing a fatal repetition. Equally spurred by these motives, and bringing their expertise from the fields of finance, economics and accounting, a group of 33 academics at New York University’s Stern School of Business set out to scrutinise the complex problems behind the grim scenes. As a result, the professors have produced 18 white papers that all suggest market-oriented solutions to the problems which have caused what they define as a ‘systemic’ financial crisis.
‘Restoring Financial Stability: How to Repair a Failed System’ is aimed at policy-makers and business executives. Discussing financial policy options from the perspectives of a free market, the authors point to a number of opportunities as well as suggest specific steps of action which range from modest regulatory changes to more fundamental ones.
To avoid future ‘systemic’ financial damage, recurring and devastating changes to competitive conditions as well as an unproductive distribution of capital, the authors put forward a number of ideas for change. In addition to the urgent need for re-establishment of market liquidity and solvency of financial institutions, risk in the system needs repricing. The changes require both special regulatory remedies and additional capital claims on financial firms causing ‘systemic’ risks.
Based on their insights into individual areas of financial theory, the authors have addressed the practical requirements of reconstructing the financial services industry. Pinning down and putting into perspective the problems as well as suggesting specific recommendations for their solutions, they make a timely and substantial contribution to the discussion of the means to a recovery and reformation of the financial system, also recommending new rules of financial behavior.
