Financial History 25th Anniversary Special Edition (104, Fall 2012) | Page 44

BOOK REVIEW  BY MICHAEL A. MARTORELLI

Financing Failure:
A Century of Bailouts

By Vern McKinley
The Independent Institute, 2011
381 pages, $17.00

History shows the federal
government has arranged
bailouts for plenty of
financial institutions from
1933 to 2009. Reasonable
people can disagree over
the need for those actions,
and for the counterfactual
history that would have
occurred had the Reconstruction Finance Corporation not taken control of
many banks in 1933, or had
Congress not approved the
Troubled Asset Relief Program (TARP) in 2008.
In his provocativelytitled Financing Failure: A
Century of Bailouts, Vern
McKinley argues such
interventions have been
ill-conceived and undesirable. Moreover, he suggests government policies
have been at least partially
responsible for the very
existence of the problems
encountered by the financial institutions that sought
and received federal help.
Anyone trying to understand the nature
of this problem will benefit from reading McKinley’s critical examination of
the analyses policy makers considered (or
didn’t consider) as they struggled to deal
with succeeding financial crises over the
past several decades.
The core of Financing Failure is McKinley’s blow-by-blow descriptions of important banking crises that occurred from 1918
to 2008, and the government’s decisions to
provide bailouts to various financial institutions. Since these crises usually occurred
after long gaps of time, it is not surprising
to read how regulators failed to learn from
the actions of their predecessors.
McKinley suggests in each of the most

42    FINANCIAL HISTORY  |  Fall 2012  | www.MoAF.org

far-reaching crises, a government policy
gone wrong had the unintended consequences of helping spawn a period of
distress that not only threatened the existence of some large financial industry
players, but also imperiled the entire economic system. In each case, regulators and
lawmakers took aggressive actions to stem
the crisis. They also went to great lengths
to justify their assistance of the troubled
firms, and then moved swiftly to change
the prevailing rules so that such an emergency would not occur again. Any reader
disappointed at the brevity of McKinley’s
versions of his selected crises will welcome his extensive use of footnotes, which
spotlight a plethora of sources describing
additional details about those problems.
McKinley traces the government’s proclivity to bailing out troubled financial
institutions to the creation of the War
Finance Corporation (WFC) in 1918. That
agency enabled banks to continue providing credit to manufacturers contributing
to the prosecution of World War I. In 1931
and 1933, Presidents Hoover and Roosevelt oversaw the creation and expansion of a similarly-structured Reconstruction Finance Corporation (RFC), which
injected capital into banks suffering the
effects of the Depression.
The author follows the government’s
subsequent ad hoc efforts to provide financial support to failing banks in selective
periods of economic distress during the
1970s and 1980s. He notes the emergence
of strong but unsubstantiated arguments
warning that extensive interbank exposure
would cause the failure of one institution
to trigger a calamitous cascade of failures
among many more counterparties.
Indeed, in supporting the bailout of the
large depositors, unsecured creditors and
correspondents of flawed and failing institutions such as Franklin National (1974),
First Pennsylvania (1980) and Continental
Illinois (1984), regulators signaled openly