Is the Banking and Payments System Fragile?

  • George J. Benston
  • George G. Kaufman
Chapter
Part of the Financial and Monetary Policy Studies book series (FMPS, volume 30)

Abstract

In his introduction to The Risk of Economic Crisis, a compilation of papers presented at a conference sponsored by the National Bureau of Economic Research (NBER), Martin Feldstein (1991, p. 1) recognizes that, despite the inability of less developed countries to service their debts, the massive collapse of savings and loan associations in the United States, wide swings in currency exchange rates, the increase in corporate and personal debt, and the stock market crash of 1987, we have not suffered an economic crisis in recent years. Nevertheless, he asserts:

But the risk of such an economic collapse remains. As Charles Kindleberger’s distinguished and fascinating book (Manias, Panics and Crashes: A History of Financial Crises [Basic Books,19781) has ably demonstrated, economic crises have been with us as long as the market economy. At some point, greed overcomes fear and individual investors take greater risks in the pursuit of greater returns. A shock occurs and the market prices of assets begin to collapse. Bankruptcies of leveraged individuals and institutions follow. Banks and other financial institutions fail in these circumstances because they are inherently leveraged. The resulting failure of the payments mechanism and the inability to create credit bring on an economic collapse (Feldstein, 1991, pp. 1–2).

Keywords

Banking System Federal Reserve Money Supply Payment System Deposit Insurance 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Copyright information

© Springer Science+Business Media New York 1995

Authors and Affiliations

  • George J. Benston
    • 1
  • George G. Kaufman
    • 2
  1. 1.Emory UniversityAtlantaUSA
  2. 2.Loyola University of ChicagoChicagoUSA

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