Abstract
The quip from books on military history is that the generals plan to fight the next war as if it were going to be similar to the last war. The counterpart statement for those who develop regulatory initiatives to forestall banking crises is that they still do not understand that the cause of the debacles in the United States, Great Britain, Iceland, Ireland, and Spain in the autumn of 2008 and why Greece and Portugal had sovereign debt crises fifteen months later.
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Notes
- 1.
An equally important question, beyond the scope of my remarks, is whether post-crisis developments have made it harder or easier to manage the next financial crisis. See the Group of Thirty (2018) where they express particular concern about US restrictions on the provision of lender-of-last-resort facilities to those who might need dollar funding in a crisis. The distinction drawn by economists between crisis prevention and crisis management seems broadly similar to the distinction drawn in other disciplines between system sustainability and system resilience. See Marchese et al. (2018).
- 2.
It is not surprising that the onslaught of the crisis has been referred to repeatedly as a “Minsky moment”. At the heart of Minsky’s explanation of financial crises is Ponzi finance, which culminates in a moment of recognition, revulsion, and sudden withdrawal (see Minsky 2008).
- 3.
See Kirman (2010), Simpson (2013), and Miller and Page (2007). Works conducted under the aegis of NAEC (New Approaches to Economic Challenges) at the OECD and at INET (The Institute for New Economic Thinking) are based strongly on this fundamental insight. For a look at some of the policy lessons, for monetary policy in particular, see White (2017).
- 4.
Suppose European banks had received less easy access to US dollars in the early stages of the global crisis.
- 5.
A similar sentiment has been expressed by Tucker (2018).
- 6.
See Singh and Aitken (2010).
- 7.
Consider the Financial Stability Oversight Council in the US, the Financial Policy Committee in the UK and the European Systemic Risk Board.
- 8.
Basel 1 was essentially decided upon by the US and the UK. See Silber (2012).
- 9.
For a much fuller analysis, see White (2014).
- 10.
The assignment of risk weights implies a belief that losses are expected in light of some probability distribution. Does this mean that unexpected losses have essentially been ignored?
- 11.
- 12.
- 13.
- 14.
Lehman Brothers was judged to be well capitalized on the day before it went bankrupt. Stress tests also indicated that all the Irish banks were well capitalized not long before the liabilities of the entire system had to be given a comprehensive guarantee by the Irish government.
- 15.
- 16.
See Bair (2018), Johnson (2009), and Taibbi (2012). One objective of lobbying is to reduce the burden of regulatory requirements on sectors (like banks) already targeted by regulators. Another is to keep problems in other sectors “off the radar” until the new sector (like shadow banking in the last crisis) has grown too big to fail and must receive government support.
- 17.
See Lund (2018). While the author asserts that there is not a corporate leverage bubble, the evidence cited could easily be interpreted as supporting the conclusion that there is such a bubble.
- 18.
This is often referred to as the “boundary problem”.
- 19.
Some have suggested that more bankers should face jail penalties to help “focus the mind”. The Financial Times recently reported that only 47 bankers worldwide went to jail after the crisis, with 23 of them being in Iceland.
- 20.
The Financial Times recently presented a whole series called “The Big Flaw: Auditing in Crisis”. They also conclude that accounting rules need to change if trust in the audit process is to be re-established.
- 21.
The Bank for International Settlements has been recommending such a policy for decades.
- 22.
An early piece that still resonates is D. Meadows (1997) whose author was involved in the “Limits to Growth” project.
- 23.
Selgin (2017, p. 13) contends that Walter Bagehot also believed that giving monopoly rights to the Bank of England to issue currency was a big mistake. However, recognizing that it was politically impossible to roll this back, Bagehot recommended the provision of lender-of-last-resort facilities as a second best approach to deal with prospective crises.
- 24.
By targeting near term CPI inflation, central banks have been forced to resist inflation which falls below their target in response to productivity gains. The resulting monetary stimulus then shows up as asset price increases and other imbalances.
- 25.
A number of institutes advocating such policies have sprung up in recent years, including the Positive Money group in the United Kingdom. In June of 2018, a proposal to install such a system in Switzerland was actually put to a referendum. It was soundly defeated, although in part at least due to fears of Switzerland being alone in adopting such a system.
- 26.
Note, however, an important difference. This would be a precondition to ensure that “free banking” would generate stabilizing outcomes. In contrast, under “narrow money”, imprudent behaviour would no longer be possible and so both regulation and safety nets would be redundant.
- 27.
See White (2016).
- 28.
Lawrence Goodman, “The Unwind: What’s Next for Global Markets,” Remarks at the Capital Markets Credit Analysts Society: Twenty-Sixth Annual Dinner Meeting, 27 May 2015, —http://www.centerforfinancialstability.org/speeches/unwind_052715.pdf.
- 29.
Richard Sandor, “A New Bretton Woods must look to the East!” Bretton Woods 2014: Center for Financial Stability, 3 September 2014.
- 30.
Michael Lewis, Flash Boys: A Wall Street Revolt (W. W. Norton, 2014).
- 31.
William White, “The 2008 Global Financial Crisis in Retrospect,” Remarks in Reykjavik, 31 August 2018.
- 32.
Robert Z. Aliber and Charles P. Kindleberger, Manias, Panics and Crashes, 7th ed. (Palgrave Macmillan, 2015).
- 33.
Lawrence Goodman, “Crisis Detection and Prevention: Implications for Investors and Officials,” Remarks at The Boston Economic Club, 23 March 2016—http://www.centerforfinancialstability.org/speeches/Boston_032316.pdf.
- 34.
Jon Danielsson, “Financial Policy After the Crisis,” Remarks in Reykjavik, August 30, 2018.
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Aliber, R.Z., White, W., Goodman, L. (2019). Summary of Panel Discussion. In: Aliber, R., Zoega, G. (eds) The 2008 Global Financial Crisis in Retrospect. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-12395-6_21
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