Anat Admati Debuts Her New Book “The Bankers’ New Clothes”, Warning Banks are as Risky as Ever

“(MoneyWatch) Anat Admati can foresee the country’s economic ruin — or its salvation. However the chips fall, she’ll be able to say “I told you so.”

In an important new book due out next month, “The Bankers’ New Clothes,” the Stanford University economist warns that the U.S. banking system is as precarious today as it was before the 2008 housing crash. And given the vulnerability of the country’s biggest banks, it won’t take the kind of gale-force financial winds that blew down the global economy roughly four years ago to trigger another collapse.

“Even without a crisis, it’s a system that is living on the edge,” Admati said in an interview.

The result: Banks often lend too much, leading to periods of wild speculation, or too little, as lenders pass up worthy loans because they can make larger profits on riskier activities. In both cases the economy suffers. Banking is “too highly indebted, and it leaves people subject to all kinds of ups and downs and booms and bust,” she added. “There are indications that the financial system is becoming bigger and bigger and more knotted up in the sense of interconnectedness.”

Admati warns that one explosion could topple the entire system.

If it does, the catalyst is almost certain to be the same ingredient that brought down the financial system — debt. Big banks are “addicted” to it, said Admati, who notes that no other corporations come close to borrowing as much money as lenders do. Immediately before the financial crisis, many large banks had debts amounting to 97 percent of their total assets. To this day, banks rely almost entirely on debt to fund their business, commonly having less than 10 percent in equity, and often as little as 5 percent. …”

Full video interview & article