Last winter, the Journal of Economic Literature invited me to submit a review of Busting the Bankers’ Club: Finance for the Rest of Us. I was tempted to decline. I have read many books and articles about banking, systemic instability, financial crises, regulation, and financial history, and this one offered little that is new, and seemed wide of what we actually know. I don’t revel in disparagement, of which we get a steady stream in news media these days. But it is equally clear from the echo chambers in the World Wide Web that some people construct their own narratives of reality, based on selective facts, alternative facts, conspiracy theories, and the like. As legal doctrine suggests, silence implies acceptance. Therefore, I decided to review the book while striving for balance, documentation, and some empathy for the labors of a fellow book-writer.
The resulting review appears below. I offer it to readers of this blog to make some points about dealing with polarized discussion today:
- “Everyone is entitled to his own opinions, but not his own facts,” said the former Senator of New York, Daniel Patrick Moynihan. So, get the facts, all the facts. In the review, I cite countervailing studies and arguments that could soften or redirect the author’s conclusions.
- Where are we? Who is the audience? Are you part of that audience or not? If not, is it a group you want to join? The writer’s sources of information, references, metaphors, rhetoric, and dog-whistles can signal whether you are part of the writer’s in-group; if you don’t get it, you’re probably in the out-group. The reason that the definition of audience matters is that it can help to explain why the writer wrote: was it to muster some activists or to inform a general audience? If the former, you may be in one of those echo chambers. In the review, I note that the book is accessible to a general audience, but that it reads like a manifesto to mobilize like-minded people, rather than to convince a broader population.
- Intense rhetoric means that the writer is trying to seize your attention. Strong language seems to be standard discourse today. I’ve served in the army and have heard everything imaginable but am still surprised by the prevalence of f-bombs in daily conversation. Intense political language is a kind of linguistic porn, aimed at arousal, be it anger, revulsion, or activism. But the listener and reader can decide not to let one’s attention be seized. And you can choose not to reply in kind. In my review I quoted (milder) words that ordinarily don’t appear in scholarly economics articles in order to alert readers to the author’s rhetoric.
- What’s new here? Does this argument advance our understanding in some way? Economists of radical and heterodox persuasion can have things to tell us that we ought to listen for (just as short-sellers, whistleblowers, and protesters may have valuable insights). But the selective use of evidence, the in-groupiness, intense rhetoric, and rehash of radical arguments did not pass the test of useful novelty. If you have heard it before, the odds are that the author is trapped in an echo chamber or inviting you into one.
JEL Book Review by Robert F. Bruner, University of Virginia. Journal of Economic Literature, American Economic Association, published online, February 27, 2025.
Busting the Bankers’ Club: Finance for the Rest of Us. By Gerald Epstein. University of California Press, 2024. Pp. xix, 362. $26.95, cloth; $26.95, e-book. ISBN 978–0–520–38564–1, cloth; 978–0–520–38565–8, e-book. (JEL E22, E44, G01, G18, G21, G28)
Financial crises arouse academicians and animate reform. JSTOR reports some 75,000 books and articles published on “financial crisis” since 2007. What remains to be said? Gerald Epstein answers with a critique of banks, crises, reforms, and the economics profession itself, reflecting heterodox and radical approaches (pp. 204–17). In thirteen chapters, Epstein aims to “break through the fog of artificially created complexity” (p. xv) about banking. He seeks to portray “the battle between the Bankers’ Club and the Club Busters over whether we will have a fair, effective, and equitable financial system… describe the financial and social issues at stake… and suggest how more of us can get involved in the struggle” (p. 13). Readers here will find a synthesis of some arguments, research, and firsthand observations. This nontechnical book is accessible to readers generally familiar with US political economy.
The first section of the book sets the stage with Epstein’s critique of the US financial sector. He writes that from 1950 to 1980, banking was “boring,” characterized as heavily regulated, predictable, and without financial crises. Boring was the blessing of New Deal–era reforms that broke up large financial institutions, established diverse regulators to monitor and enforce rules, capped interest rates on deposits, and quelled speculation. Then a series of new laws beginning in 1980 “destroyed the New Deal regulatory structures” (p. 281), and banking started “roaring.” Increasing complexity, more speculation, and new financial products and institutions produced the crisis of 2007–2009. This is a familiar argument (e.g., Stiglitz 2003; Krugman 2009; Johnson and Kwak 2010). But Epstein’s historical tour elides why the regulatory regime changed: disruptions such as inflation, the digital revolution and electronic market making, the shift in trading volume from retail investors to institutional investors, entry by nonbanks, globalization, and not least changes in government housing policy and voter sentiment favoring deregulation.
The second section interrogates the agent of roaring banking: a “bankers’ club.” Epstein sees a large collective of financial institutions, service providers, regulators, mainstream economists, and especially the Federal Reserve (hereafter, the Fed), which he places at the apex. The problems with the club are “greed… run amuck” (p. xvi), conflicts of interest (p. 43), and corruption (p. 53). So how do you reform it?
Comprehensively, says Epstein. The third section envisions a financial sector based on four principles: “1. Simpler is better, with clear bright lines… 2. Comprehensive coverage… of regulatory oversight… 3. Strictly limit the concentrations of private power… the size and reach of private financial institutions… 4. [A] precautionary approach to financial innovation” (p. 231). But Epstein’s discussion raises more questions, neglects earlier proponents, and lacks a response to countervailing ideas and findings.
Simplicity and Clarity.—Epstein proposes to fight complexity in the financial system and thereby reduce systemic risk. The targets for Epstein’s simplification are the “mega-banks.” Is that the best place to focus reforms?
Large banks grabbed headlines at the peak of the crisis of 2007–2008, but the federal government and shadow banks kindled and stoked the crisis (Rajan 2010; Wallison 2015; Garber 2019). US housing policy sought to promote urban redevelopment and expand homeownership by marginalized segments of society. And global capital inflows (Bernanke 2010) combined with accommodative monetary policy by the Fed stimulated home building and buying (Taylor 2007, 2009). These policies prompted growth in government debt guarantees, mortgage credit, and especially subprime debt. Entities in the shadows accommodated this surge, rated it as investment grade, and invented complex financial instruments for hedging mortgage debt, new markets for trading debt, and new organizational forms for holding it. The report of the Financial Crisis Inquiry Commission (2011) describes a mutually reinforcing system of entities in government and the private financial sector that drove the crisis of 2007–2009. Crises tend not to start in the regulated center of a financial system but in the shadows (Rockoff 2018)—wouldn’t it be better to focus reform efforts there and then extend toward the center as necessary? Anyway, are large institutions necessarily unstable? The answer is no: Calomiris and Haber (2014) show that the financial system of Canada has been dominated by a few large institutions with nationwide branch networks with “extraordinary stability… for nearly two centuries” (p. 283).
Are there alternatives to Epstein’s proposals for reducing systemic risk? For instance, Brunnermeier (2021) argues that systemic stability would be best served not by risk reduction (variance management) but rather by resilience enhancement (management of mean reversion). The book is silent about this and other alternatives.
Comprehensive Oversight.—Epstein argues for regulatory coverage of the entire financial system and for the consolidation of the numerous regulators of various parts of the US system. Yet consolidated regulatory authority did not help the United Kingdom avoid crisis in 2007–2008. Why would his consolidated authority work any better? And elsewhere, he objects to the powerful influence of the Federal Reserve System and its alleged capture by the “Bankers’ Club” (p. 134). He argues that instead we should “overcome… simplistic arguments about ‘Federal Reserve independence’… and coordinate [the Fed’s] policies to a greater extent with the government… and make the Fed more accountable to Congress” (pp. 270–71). Today, experiments in such increased coordination at various agencies are unfolding, for which the improvements in accountability to Congress remain to be seen.
Concentrations of Power.—The nub of this book is Epstein’s concern about the political influence of the bankers’ club and the action necessary to bust it. He sketches a financial “Iron Triangle” (p. 108), an alliance among legislators, agencies, and the broad financial sector that allegedly aims for private gain at public expense. Characterizing the entire club as a “conspiracy” (p. 99) engaged in illegal activity (p. 53) is a serious charge, for which readers will hanker for more evidence than Epstein offers.
Are iron triangles a problem of American finance or of American democracy? OpenSecrets (2025) reports large amounts of money spent by business groups, unions, NGOs, and individuals on lobbying and campaign contributions. Will busting the banks alone address Epstein’s concern that “money drives way too much of our politics” (p. 126)?
Do the interests of such alliances always and everywhere conflict with the public interest? Might the quality of laws and regulations improve with technical consultation among agencies, congressional committees, and interest groups? Such alliances have waxed and waned across industries and time. Shifting public opinion and voter sentiment, the death or defeat of congressional and agency champions, technological change, and financial crises have triggered changes in alliances such as trucking, airlines, and the thrift industry.
The centerpiece of Epstein’s principles is his call for breaking up the mega banks. So, how would he “bust” such power? Would a size limit or restoring the Glass–Steagall Act diminish the risk of financial crises? Numerous writers think not or believe there are better solutions (Bailey 2016; Bernanke 2015; Geithner 2014; Schlisserman 2010; Tarullo 2017; HousingWire Staff 2012; Reuters 2010; Frank 2015; Bair 2012; Admati and Hellwig 2013; Calomiris and Haber 2014; Gorton 2010; Gorton and Tallman 2018; and Scott 2016). Epstein does not address the countervailing views.
In addition to busting the mega-banks, Epstein proposes the creation of “public financial institutions that can do the bankers’ job better” (p. 90). He devotes a chapter to an interesting survey of different organizational forms and the broader social missions he thinks that public institutions should serve. Epstein reviews recent proposals under which public banks would afford preferential terms (such as capped interest rates) on credit rationed toward “excluded and marginalized groups and ecological sustainability” (pp. 266–67). Will such banks be able to cover their own costs? Epstein glosses over issues such as public banks’ vulnerability to political pressure, amount of taxpayer money required, and the efficiency of such institutions.
Precautionary Approach to Financial Innovation.—Epstein points to complex securities associated with the crisis of 2007–2008 and expresses concern about the advent of cryptocurrencies. Some caution seems warranted. His approach would require “all new innovations to be licensed and regulated… [and] in risky cases… required to demonstrate their value and safety prior to widespread dissemination” (p. 231), though he provides little detail about how.
His assertion that “there is little or no empirical evidence that… financial innovations have contributed to significant improvements in economic welfare” (p. 74) is contestable. Scholars have argued that financial innovations boost growth, reduce costs, complete incomplete markets, resolve agency and information problems, capitalize on technological innovation, promote risk sharing, and allocate credit more effectively (e.g., Tufano 2003; Shiller 2003; Laeven, Levine, and Michalopoulos 2015; Dynan, Elmendorf, and Sichel 2006; Iachan, Nenov, and Simsek 2021).
In conclusion, the reader seeking scholarship in the form of new knowledge or new and thorough synthesis of what is already known will be disappointed. What’s new here? Many of Epstein’s substantive criticisms of instability in the private and public sectors of the US financial system already reside in the mainstream literature (Johnson and Kwak 2010; Financial Crisis Inquiry Commission 2011; Admati and Hellwig 2013; Mian and Sufi 2014; Ricks 2016; and Menand 2022). The book raises more questions than it answers and falls short of its goal of piercing the “fog” about banking’s complexity.
But this book will gratify readers seeking advocacy. Busting the Bankers’ Club reads like a manifesto, mobilizing like-minded people. Epstein fulfills his aim of portraying “the battle… the… issues at stake… and… the struggle” (p. 13). With brio, he admonishes “mainstream economics [for] supporting the Bankers’ Club” (p. 204). He cites the neglect and snubs of heterodox and radical economists and sketches the rise of an intellectual ecosystem based on these approaches, made necessary by their exclusion from the mainstream. Dispensing with “costly economic theories and practices,” such as those of the Chicago School, he reminds readers of John Maynard Keynes’s warning against becoming “the slaves of some defunct economist” (p. 197). Epstein criticizes the American Economic Association for biases, though he acknowledges recent reforms and more changes underway. Throughout this book, his impatience with the pace of change is palpable. Busting the Bankers’ Club affords a spirited, if tendentious, call for self-examination in the field of economics, which is a useful contribution. Reflective scrutiny is a cardinal attribute of a profession.
REFERENCES
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