I recommend Matt Yglesias’s post on A Call for Judgment, a book I very much enjoyed. But let me chime in on two points:

The main prescription is essentially a new version of Glass-Steagall with the default switched around in order to make it more secure against erosion. Insured depository institutions will be given a menu of permitted functions and told they’re not allowed to do anything else. Bhidé then proves his conservative bona fides by pairing this populist suggestion with the idea that financial firms outside this sphere of guarantees should be completely deregulated, which presumably will be paired with the Ben Bernanke swearing a “cross my heart and hope to die” oath not to undertake any future bailouts.

I actually don’t think this has anything to do with proving conservative bona fides. Rather, Bhidé sees tight securities regulations as a barrier to relationship-based finance, in which the owners of public companies are allowed to exercise real oversight. The idea is to structurally encourage more due diligence and more risk aversion on the part of investors.

Moreover, Bhidé’s invocation of Hayek and Frank Knight reflects his view that the fact that knowledge is dispersed and deep uncertainty can’t be quantified is central to his case against backward-looking, mechanistic models in a dynamic economy.

At any rate, even though I thought the ideological self-positioning of the author got a bit annoying I do think everyone should read this book. For one thing, though Bhidé doesn’t seem super-interested in pursuing this line of inquiry, I think that if it’s correct it fills in the microfoundations missing from the argument of Hacker and Pierson’s Winner-Take-All Politics by producing a plausible account of how developments in the financial sector could produce both super-inequality and middle class stagnation through the misallocation of resources away from real economy innovators.

The moral hazard rents that rightly concern Ashwin Parameswaran are addressed by the tight limits Bhidé proposes for the banking sector. But otherwise, Bhidé isn’t particularly concerned about hedge funds, for at least some of the reasons that Sebastian Mallaby has identified:

“When [bank] traders take enormous risks, they earn fortunes if the bets pay off. But if the bets go wrong, they don’t endure symmetrical punishment—the performance fees and bonuses dry up, but they do not go negative….Hedge funds [on the other hand] tend to have ‘high-water marks’: If they lose money one year, they take reduced or even no performance fees until they earn back their losses.” Additionally, most hedge fund managers invest in their own funds—a powerful incentive to avoid losses. By contrast, while bank traders often own company stock, they do not risk their personal savings in the pools of money they manage. Mallaby concludes that consequently the typical hedge fund is more cautious in its use of leverage: the average hedge fund borrows only one or two times its investors’ capital, and those that are considered highly leveraged generally borrow less than ten times, while broker-dealers such as Goldman Sachs or Lehman Brothers were leveraged thirty to one before the crisis, and banks like Citi were even higher by some measures.

The prospect of symmetrical punishment is a disciplining force. Kaplan and Rauh [PDF] observe that Wall Street has been heavily represented at the top of the income distribution, yet they combine investment bankers, hedge fund investors, VC investors, and PE investors. For Bhidé, to put it crudely, hedge fund investors, VC investors, and PE investors are unobjectionable. VC investors in particular are singled out for emphasizing case-by-case judgment. And executives in closely-held firms, the paradigmatic real economy success stories, are another big slice of the top 0.01%.

Insofar as Hacker and Pierson are concerned about super-inequality and say, its implications for our domestic political order, I don’t think they’ll find much solace in Bhidé’s analysis. As Matt writes,

A liberal might make this argument with some reference to the misfortunes of workers or poor people, Bhidé instead worries that the backlash against super-rich princes of Wall Street may lead to unfair castigation of the super-rich princes of the real economy.

Though I think Bhidé is definitely concerned about the misfortunes of workers or poor people, though of course he is a native of India who might have a somewhat different perspective on these issues, he is indeed concerned about the unfair castigation of the super-rich princes of the real economy, and for good reason.

P.S. In fairness to Matt, his point is a bit narrower — Bhidé describes how the financialization of the economy may have contributed to sluggish wage growth, and so his thesis is useful to egalitarian liberals. I still think the mechanism isn’t terribly strong, e.g., a more dynamic economy with greater capital productivity might have proven more unequal. But I see Matt’s point.