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Other titles in the Hoover Inst Press Publication series:
Ending Government Bailouts as We Know Them (Hoover Inst Press Publication)by Kenneth E. Scott
Synopses & Reviews
How Do We Make Failure Tolerable?
The American people are clearly upset about the massive government bailouts of faltering organizations and the consequent commitment of taxpayer dollars-as well as the heavy involvement of the federal government in private sector activities. How do we approach a problem of this magnitude? The key question, which George Shultz presents at the outset, is: How do we make failure tolerable? In other words, if clear and credible measures can be put into place that convince everybody that failure will be allowed, then the expectations of bailouts will recede and perhaps even disappear. Perhaps more important, we would also get rid of the risk-inducing behavior that even implicit government guarantees bring about. In Ending Government Bailouts as We Know Them, a team of expert contributors examine the dangers of continuing government bailouts and offer constructive alternatives designed to both resolve the current bailout problem and prevent future crises.
The other contributors follow up on Shultz's premise with discussions on a range of key topics. They begin with the nature of systemic risk-particularly in the experience of the Lehman Brothers bankruptcy-and the reforms that financial firms can implement, whether or not required by government regulatory agencies. They also explore in detail the two main alternatives to government bailouts in the case of a failing financial firm: bankruptcy versus resolution authority. The book concludes with a summary of the commentary on the chapters by formal discussants and the audience at the conference, ranging from constructive critiques to strong endorsements to ideas for future research.
This book provides strategies designed to “make failure tolerable” and eliminate the bailout mentality both now and in the future. The distinguished authors also show that it is indeed possible—and necessary—to explain the causes of the crisis in understandable terms and clarify why resolving the bailout problem is essential to preventing future crises.
The American people are clearly upset about the massive government bailouts of faltering organizations and the consequent commitment of taxpayer dollars—as well as the heavy involvement of the federal government in private sector activities. In Ending Government Bailouts as We Know Them, a team of expert contributors examine the dangers of continuing government bailouts and offer constructive alternatives designed to both resolve the current bailout problem and prevent future crises. The authors stress the importance of first explaining the crisis in understandable terms and then providing the type of strategies that “make failure tolerable” and eliminate the bailout mentality both now and in the future.
About the Author
Kenneth E. Scott, the Parsons Professor Emeritus of Law and Business at Stanford Law School and a Hoover Institution senior research fellow, is a leading scholar in the fields of corporate finance reform and corporate governance who has written extensively on federal banking regulation. His current research concentrates on legislative and policy developments related to the current financial crisis, comparative corporate governance, and financial regulation. He has extensive consulting experience, including work for the World Bank, the Federal Deposit Insurance Corporation, the Resolution Trust Corporation, and, most recently, the National Association of Securities Dealers. He is also a member of the Shadow Financial Regulatory Committee, the Financial Economists Roundtable, and the State Bar of California's Financial Institutions Committee. Before joining the Stanford Law School faculty in 1968, he served as general counsel to the Federal Home Loan Bank Board and as chief deputy savings and loan commissioner of California and worked in private practice in New York with Sullivan & Cromwell.
George P. Shultz is the Thomas W. and Susan B. Ford Distinguished Fellow at the Hoover Institution. Among many other senior government and private sector roles, he served as secretary of labor in 1969 and 1970, as director of the Office of Management and Budget from 1970 to 1972, and as secretary of the Treasury from 1972 to 1974. He was sworn in on July 16, 1982, as the sixtieth U.S. secretary of state and served until January 20, 1989. In January 1989, he was awarded the Medal of Freedom, the nation’s highest civilian honor. Shultz rejoined Stanford University in 1989 as the Jack Steel Parker Professor of International Economics at the Graduate School of Business and as a distinguished fellow at the Hoover Institution. He is the Advisory Council chair of the Precourt Institute for Energy Efficiency at Stanford and chair of the Energy Initiative External Advisory Board at the Massachusetts Institute of Technology. He is the chairman of Governor Schwarzenegger’s Council of Economic Advisers and a distinguished fellow of the American Economic Association.
John B. Taylor is the Bowen H. and Janice Arthur McCoy Senior Fellow at the Hoover Institution and the Mary and Robert Raymond Professor of Economics at Stanford University. Among other roles in public service, he served as a member of the President’s Council of Economic Advisers from 1989 to 1991 and as undersecretary of the Treasury for international affairs from 2001 to 2005. He is currently a member of the California Governor’s Council of Economic Advisers. His new book Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis is an empirical analysis of the recent financial crisis. He also recently coedited The Road ahead for the Fed in which twelve leading experts, himself included, examine and debate proposals for financial reform and exit strategies from the financial crisis. Before joining the Stanford faculty in 1984, Taylor held positions as a professor of economics at Princeton University and Columbia University. He received a BS in economics summa cum laude from Princeton and a PhD in economics from Stanford University in 1973.
Table of Contents
Preface by Kenneth E. Scott, George P. Shultz, and John B. Taylor
Part I: The Danger of Bailouts and Key Principles of Reform
1. Make Failure Tolerable by George P. Shultz
2. Financial Reforms to End Government Bailouts as We Know Them by Paul Volcker
3. Fifty Years in the Business: From Wall Street to the Treasury and Beyond byNicholas F. Brady Part II: Systemic Risk in Theory and in Practice
4. Defining Systemic Risk Operationally by John B. Taylor
5. Lessons Learned from the Lehman Bankruptcy by Kimberly Anne Summe
Part III: What Financial Firms Can Do
6. A Contractual Approach to Restructuring Financial Institutions by Darrell Duffie
7. Wind-down Plans as an Alternative to Bailouts: The Cross-Border Challenges by Richard J. Herring
8. Wind-down Plans, Incomplete Contracting, and Renegotiation Risk: Lessons From Tiger Woods by Joseph A. Grundfest
Part IV: Bankruptcy versus Resolution Authority
9. Expanding FDIC-Style Resolution Authority by William F. Kroener III
10. The Kansas City Plan by Thomas M. Hoenig, Charles S. Morris, and Kenneth Spong
11. Chapter 11F: A Proposal for the Use of Bankruptcy to Resolve Financial Institutions by Thomas H. Jackson
12. Evaluating Failure Resolution Plans by Kenneth E. Scott
A Summary of the Commentary by Johannes Stroebel
A Conversation about Key Conclusions by George P. Shultz and John B. Taylor
Appendix: The Financial Crisis: Causes and Lessonsby Kenneth E. Scott
About the Authors
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