bank run

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pages: 549 words: 147,112

The Lost Bank: The Story of Washington Mutual-The Biggest Bank Failure in American History by Kirsten Grind

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asset-backed security, bank run, banking crisis, big-box store, call centre, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, housing crisis, Maui Hawaii, mortgage debt, naked short selling, NetJets, shareholder value, short selling, Skype, too big to fail, Y2K

Despite the bickering, the WaMu executives’ concern was right on the mark. In just three days, customers pulled out a collective $1.5 billion, surpassing IndyMac’s giant deposit loss. “We had never seen anything like it,” said one of the deposit team managers later. WaMu’s own bank run was now, officially, under way. On the fourth day, a Tuesday, customers withdrew $1.8 billion. Together those two numbers represented about 2 percent of WaMu’s retail deposit base of $148.2 billion.* The last time WaMu had suffered through a bank run of this magnitude was in midst of the Great Depression.23 On a cold February morning in the winter of 1931, Seattle residents woke up to a banner headline in the local paper: the troubled Puget Sound Savings and Loan Association would not open the next day. WaMu customers read about the failed bank and worried about WaMu’s health.

“I will appreciate any help you can provide in snuffing out this ember.” To keep from further spooking customers, WaMu held off on closing about a hundred branches across the country that hadn’t been making money, and that had been scheduled to close before the run started. No one wanted to give the public any reason to think WaMu was shutting down. On the Tuesday when WaMu customers withdrew $1.8 billion, the bank run peaked. Then it began to subside. Bank runs, while they are sparked by unknown events, generally play out like a bubble, with a run-up, a climax, and a fall. WaMu’s run was no different. Soon deposit outflows fell back into the range of hundreds of millions of dollars. Two weeks after IndyMac’s failure, the WaMu panic ended. WaMu had lost a stunning $9.4 billion in deposits—nine times the amount of the much-publicized IndyMac run.

Not long after this exchange, Killinger and several members of WaMu’s executive team flew to Washington for a joint meeting with Reich, Bair, and their respective deputies. WaMu had called the meeting as a way to update the regulators on the bank’s financial condition following the bank run. They had no idea that their bank had fueled such a battle between the two agencies. In Reich’s conference room at the OTS’s frayed headquarters, Killinger and WaMu’s treasurer, Robert Williams, ran through WaMu’s capital and liquidity positions. WaMu was considered well capitalized, even though it had just posted a stunning $3.3 billion loss in the second quarter because of its bad loans—its highest quarterly loss ever. As a result of the bank run, the bank’s liquidity had drained to about $50 billion. The government agencies still deemed that amount healthy. Customers were bringing money back thanks to the 5 percent CD special.

 

pages: 475 words: 155,554

The Default Line: The Inside Story of People, Banks and Entire Nations on the Edge by Faisal Islam

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Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, British Empire, capital controls, carbon footprint, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, credit crunch, Credit Default Swap, crony capitalism, dark matter, deindustrialization, Deng Xiaoping, disintermediation, energy security, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, financial repression, floating exchange rates, forensic accounting, forward guidance, full employment, ghettoisation, global rebalancing, global reserve currency, hiring and firing, inflation targeting, Irish property bubble, Just-in-time delivery, labour market flexibility, London Whale, Long Term Capital Management, margin call, market clearing, megacity, Mikhail Gorbachev, mini-job, mittelstand, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, North Sea oil, Northern Rock, offshore financial centre, open economy, paradox of thrift, pension reform, price mechanism, price stability, profit motive, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, reshoring, rising living standards, Ronald Reagan, savings glut, shareholder value, sovereign wealth fund, The Chicago School, the payments system, too big to fail, trade route, transaction costs, two tier labour market, unorthodox policies, uranium enrichment, urban planning, value at risk, working-age population

In the USA, such bank holidays had not been called since the Great Depression of the 1930s. I wondered if the Eurogroup geniuses who had set the Cypriot bank run in motion had ever read Roosevelt’s ‘fireside chat’, delivered on the radio in similar circumstances exactly eighty years previously: ‘It needs no prophet to tell you that when the people find that they can get their money – that they can get it when they want it for all legitimate purposes – the phantom of fear will soon be laid.’ Thus, in a statesmanlike way, Roosevelt used the broadcast media to boost confidence and douse the flames of financial panic. Sadly, no statesman of similar stature emerged in Europe during the Eurozone crisis. In 1933 Roosevelt stopped bank runs by creating deposit insurance. In 2013 the Troika created pent-up demand for a bank run by stopping deposit insurance. From big bang to basket case It should not be forgotten that Cyprus, two years before its financial collapse, was largely untroubled, fairly wealthy, and certainly not a basket case.

Dozens, if not hundreds, of journeys by truck and boat spread the new notes across the mainland and the islands, from Rhodes to Corfu, from Crete to Komotini near the Turkish border. Staff worked through the night to ensure that bank branches across Greece had sufficient notes to meet depositor demand, and so contain any incipient physical bank run. Incredibly, this operation proceeded without anyone noticing. The Bank of Greece tracked a demand for paper currency through bank branch orders for currency. Large withdrawals were normally granted with notice of a day or two. The Bank also noticed a spike in purchases of gold sovereigns. It did not have to deploy teams of ‘bank-run spotters’ as the Bank of England had done in the crisis of 2008. As far as ordinary Greeks were concerned, the cash machines continued to function. However, underneath their very noses a monetary revolution was taking place… The simple balance sheet of the Bank of Greece showed no disturbance from these tumultuous events on the stock of notes and coins in circulation in the country.

Greeks had responded to the uncertainty regarding the Troika’s next move by withdrawing euros from their bank accounts at a record rate. Soon there would be not enough euro notes in the country to cope with the number of Greeks trying to get their hands on their money from cash machines and bank branches. A secret plan was activated. A senior official overseeing Greece’s bailout told me that when it became known that the IMF were considering not paying out the final tranche, there was the beginning of a bank run. ‘We’re talking about June 2011,’ he told me, ‘when Greeks were taking about one to two billion euros a day from the banking system. And the Greeks had to send military planes to Italy to get banknotes. It got to that point.’ A decade after it gave up the drachma, the world’s oldest existing currency, Greece faced the crushing reality that it did not have the sovereign authority to meet the demand for paper currency from its own citizens.

 

pages: 267 words: 71,123

End This Depression Now! by Paul Krugman

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airline deregulation, Asian financial crisis, asset-backed security, bank run, banking crisis, Bretton Woods, capital asset pricing model, Carmen Reinhart, centre right, correlation does not imply causation, credit crunch, Credit Default Swap, currency manipulation / currency intervention, debt deflation, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, full employment, German hyperinflation, Gordon Gekko, Hyman Minsky, income inequality, inflation targeting, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, low skilled workers, Mark Zuckerberg, moral hazard, mortgage debt, paradox of thrift, price stability, quantitative easing, rent-seeking, Robert Gordon, Ronald Reagan, Upton Sinclair, We are the 99%, working poor, Works Progress Administration

Why, fear that the bank might be about to fail, perhaps because so many depositors are trying to get out. So banking carries with it, as an inevitable feature, the possibility of bank runs—sudden losses of confidence that cause panics, which end up becoming self-fulfilling prophecies. Furthermore, bank runs can be contagious, both because panic may spread to other banks and because one bank’s fire sales, by driving down the value of other banks’ assets, can push those other banks into the same kind of financial distress. As some readers may already have noticed, there’s a clear family resemblance between the logic of bank runs—­especially contagious bank runs—and that of the Minsky moment, in which everyone simultaneously tries to pay down debt. The main difference is that high levels of debt and leverage in the economy as a whole, making a Minsky moment possible, happen only occasionally, whereas banks are normally leveraged enough that a sudden loss of confidence can become a self-fulfilling prophecy.

The main difference is that high levels of debt and leverage in the economy as a whole, making a Minsky moment possible, happen only occasionally, whereas banks are normally leveraged enough that a sudden loss of confidence can become a self-fulfilling prophecy. The possibility of bank runs is more or less inherent in the nature of banking. Before the 1930s there were two main answers to the problem of bank runs. First, banks themselves tried to seem as solid as possible, both through appearances—that’s why bank buildings were so often massive marble structures—and by actually being very cautious. In the nineteenth century banks often had “capital ratios” of 20 or 25 percent—that is, the value of their deposits was only 75 or 80 percent of the value of their assets. This meant that a nineteenth-century bank could lose as much as 20 or 25 percent of the money it had lent out, and still be able to pay off its depositors in full.

On one side, Glass-Steagall established the Federal Deposit Insurance Corporation (FDIC), which guaranteed (and still guarantees) depositors against loss if their bank should happen to fail. If you’ve ever seen the movie It’s a Wonderful Life, which features a run on Jimmy Stewart’s bank, you might be interested to know that the scene is completely anachronistic: by the time the supposed bank run takes place, that is, just after World War II, deposits were already insured, and old-fashioned bank runs were things of the past. On the other side, Glass-Steagall limited the amount of risk banks could take. This was especially necessary given the establishment of deposit insurance, which could have created enormous “moral hazard.” That is, it could have created a situation in which bankers could raise lots of money, no questions asked—hey, it’s all government-insured—then put that money into high-risk, high-stakes investments, figuring that it was heads they win, tails taxpayers lose.

 

pages: 310 words: 90,817

Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown by Detlev S. Schlichter

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bank run, banks create money, British Empire, capital controls, Carmen Reinhart, central bank independence, currency peg, Fractional reserve banking, German hyperinflation, global reserve currency, inflation targeting, Kenneth Rogoff, Long Term Capital Management, market clearing, Martin Wolf, means of production, moral hazard, mortgage debt, open economy, Ponzi scheme, price discovery process, price mechanism, price stability, pushing on a string, quantitative easing, reserve currency, rising living standards, risk tolerance, savings glut, the market place, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, Y2K

If money demand has not risen, the additional money will be absorbed via a tendency toward higher prices, that is, a lower purchasing power of the individual monetary unit. The only constraining factor is the overall level of reserves and the risk of a bank run. If too many people ask to exchange their fiduciary media for money proper, any bank will face the risk of running out of reserves. Naturally, this risk increases if the bank is perceived to be in trouble, maybe as a result of problems in its loan portfolio. Once the soundness of a bank is questioned, outflows are likely to accelerate. In a fractional-reserve banking system, and that means today practically every banking system, every bank is potentially at risk of a bank run. A paper money system and a fractional-reserve banking system are confidence-based. Once the confidence goes, the system collapses. This is the real regulating factor of a fractional-reserve banking system, and not demand for money or demand for loans as is often assumed.

As long as confidence is maintained in the soundness of the banking system, the banks can create more money and place this money with the public. They can increase borrowing and therefore overall levels of debt. Today extensive measures have been taken and an elaborate regulatory infrastructure has been erected to reduce the risk of bank runs and to increase the confidence of the public in the soundness of the fractional-reserve banking industry. More importantly, the abandonment of a metallic standard and the adoption of a full paper money system have removed the inelasticity of bank reserves. When banks run low on reserves and face increased outflows (naturally redemptions are no longer in gold but in physical paper money or in the form of transfers to other banks), they can get new reserves from the central bank, which has a lender-of-last-resort function and, under a paper money standard, can create as much reserve money as it wishes “at essentially no cost” (Bernanke).

In the 10 years to the start of the most recent crisis in 2007, bank balance sheets in the United States more than doubled, from $4.7 trillion to $10.2 trillion.3 The Fed’s M2 measure of total money supply rose over the same period from less than $4 trillion to more than $7 trillion.4 From 1996 to 2006, total mortgage debt outstanding in the United States almost tripled, from $4.8 trillion to $13.5 trillion,5 as house prices appreciated, in inflation-adjusted terms, three times faster as over the preceding 100 years.6 Why I Wrote This Book It seems undeniable that elastic money has not brought greater stability. Regarding the stability of money’s purchasing power, the historical record of paper money systems has always been exceptionally poor. But it is now becoming increasingly obvious that the global conversion to paper money has also failed to put an end to bank runs, financial crises, and economic depressions. Quite to the contrary, those crises appear to become more frequent and more severe the longer we use fully elastic money and the more the supply of immaterial money expands. Astonishingly, there is an established body of economic theory that explains with great clarity and precision why this must be the case: the Currency School of the British Classical economists and, in particular, the Austrian School of Economics.

 

pages: 726 words: 172,988

The Bankers' New Clothes: What's Wrong With Banking and What to Do About It by Anat Admati, Martin Hellwig

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Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, bonus culture, Carmen Reinhart, central bank independence, centralized clearinghouse, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, diversified portfolio, en.wikipedia.org, Exxon Valdez, financial deregulation, financial innovation, financial intermediation, George Akerlof, Growth in a Time of Debt, income inequality, invisible hand, Jean Tirole, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, London Interbank Offered Rate, Long Term Capital Management, margin call, Martin Wolf, moral hazard, mortgage debt, mortgage tax deduction, Nick Leeson, Northern Rock, open economy, peer-to-peer lending, regulatory arbitrage, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, shareholder value, sovereign wealth fund, technology bubble, The Market for Lemons, the payments system, too big to fail, Upton Sinclair, Yogi Berra

Ordinary payment processes show a mixture of randomness and predictability that allows the bank to pay its depositors without difficulties by maintaining some cash reserves. Problems arise, however, if many depositors demand their money at the same time. This could happen if depositors become worried about the bank’s solvency and try to get their money out before it is too late. As we know from the fate of the Bailey Building and Loan Association in the movie, this can give rise to a bank run. Bank runs are sometimes discussed as examples of self-fulfilling expectations; that is, events that become reality just because people expect them and act on the basis of these expectations. If investors fear that other investors are about to run and withdraw their money from the bank, it may make sense for them to run themselves and try to withdraw their money. They know that an important part of the bank’s funds is tied up in illiquid investments and that the promises the bank has made to depositors cannot be fulfilled if too many people want their money at the same time.

Following the Great Depression, in 1935 the United States created a federally guaranteed deposit insurance system to protect depositors from the consequences of bank failures and to prevent bank runs.22 When an insured bank fails, the FDIC takes over and winds the bank down without damage to the depositors.23 By now this process works so well that depositors do not go a day without access to their funds. Because they have nothing to fear and it is a hassle to move accounts from one bank to another, depositors tend to stay with the same bank for long periods of time. Deposit insurance is less well established in other countries, but depositors can still count on some form of protection in most places.24 The Breakdown of “3-6-3” Traditional Banking In the United States, the reforms of the 1930s were followed by four decades of exceptional stability in the banking industry. Bank runs were a thing of the past. Commercial banks and savings banks flourished because funding was stable and risks in lending relatively small.

See sovereign default default, by individuals, on mortgages. See mortgage default Delaware, bankruptcy in, 247n19 deleveraging, through asset sales, 64, 175, 257n19, 306n30 demand deposits: availability of, as benefit to economy, 49, 148; in balance sheets, 48, 248n4; in bank runs, 51–52, 150–53; as form of money, 294n10; in payment system, 49. See also deposit(s) Demirguç-Kunt, Asli, 251n24, 315n74 Demyanyk, Yuliya, 254nn43–44, 297n33 De Nicolò, Gianni, 249n12 Denmark, costs of bailouts in, 292n39 deposit(s): in balance sheets, 48–49; bank loans funded by, 48–49, 51–52; banknotes and, 149–50; in bank runs, 51–52; beneficial to economy, in payment system, 49, 148, 152–53; versus cash, 153, 154, 294n10; cost of, for banks, 111; as form of money, 150, 293n10; as funding sources of banks, 48–49, 51–52, 111, 150, 278n21; insurance on (See deposit insurance); in liquidity transformation, 155–56, 250n17; in maturity transformation, 51; as money-like debt, 154–56; in savings and loans institutions, 248n2; in solvency risks from maturity transformation, 51; as unique service of banks, 148; and vulnerability to runs, 150–53 deposit insurance: creditors protected by, 62, 163; in Europe, 242n25; as explicit guarantee, 129, 136–37, 139; functions of, 62; money market funds as lacking, 67, 93, 309n47; premium charged for, 111, 136–37; runs in absence of, 93, 273n46; in United States (See Federal Deposit Insurance Corporation; Federal Savings and Loan Insurance Corporation) Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980 (U.S.), 251n28 deregulation: and concentration in financial sector, 89, 269n27; of interest rates, 54, 251n28; of mergers, 251n28; in savings and loan crisis of 1980s, 55, 252n35; of savings banks, 54–55, 94, 251n28 derivatives, 69–74; accounting rules for treatment of, 71, 85–86, 260n42, 266n11, 266n13; in bankruptcy, exceptions for, 164, 227, 236n35, 301n55, 336n57; clearinghouses for, 334n46; complexity of, 71–72; credit insurance as, 73–74; definition of, 69; forward contracts as, 69–70; gambling with, 70–71, 73, 123; history of, 70; in LTCM crisis of 1998, 72; netting of, 85–86, 267nn15–17; regulatory capture and, 204; rise of, 70; risks from, 70–73; scandals involving, 70–71, 328n6; transparency in, lack of, 71–72, 261n43; transparency in, proposal to increase, 204, 325n51; types of, 69–70, 260n37.

 

pages: 424 words: 121,425

How the Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy by Mehrsa Baradaran

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access to a mobile phone, affirmative action, asset-backed security, bank run, banking crisis, banks create money, barriers to entry, British Empire, call centre, Capital in the Twenty-First Century by Thomas Piketty, cashless society, credit crunch, David Graeber, disintermediation, diversification, failed state, fiat currency, financial innovation, financial intermediation, Goldman Sachs: Vampire Squid, housing crisis, income inequality, Internet Archive, invisible hand, Kickstarter, M-Pesa, McMansion, microcredit, mobile money, moral hazard, mortgage debt, new economy, Own Your Own Home, payday loans, peer-to-peer lending, price discrimination, profit maximization, profit motive, quantitative easing, race to the bottom, rent-seeking, Ronald Reagan, Ronald Reagan: Tear down this wall, savings glut, the built environment, the payments system, too big to fail, trade route, transaction costs, unbanked and underbanked, underbanked, union organizing, white flight, working poor

“The mechanic or day laborer who would have a feeling of timidity about entering a big banking house to deposit a small share of his earnings, would gladly avail himself of an opportunity to make the deposit with the local post-master, for the reason that he feels that he has as much right to be there as any other man, for the post-office is a part of the Governmental structure he helps support, and he reckons justly that he is entitled to share in its benefits.”39 The second purpose of general reform was also present from the beginning. Creswell reasoned that the postal banks would cure the bank runs that were endemic to the banking system in the nineteenth century: “The financial difficulties in which the country has been … involved … have demonstrated the necessity for some means of maintaining confidence in times of threatened disaster, and of gathering and wisely employing the immense wealth scattered among the people, to prevent panic and escape the ruin which inevitably follows in its track.”40 Indeed, many bank runs occurred between 1880 and 1910, afflicting both national and state banks and causing nationwide distrust.41 A government-supported bank would go a long way toward infusing trust back into the system.

Even though total deposits didn’t rise during this time, most of the bank failures happened in those midregions, where the deposits did rise the most. When more banks started to fail nationwide, postal savings increased correspondingly. 115. Ibid., 718. 116. Ibid., 710. 117. David Hu, “The Influence of the U.S. Postal Savings System on Bank Runs,” Yale Journal of Economics 2, iss. 1 (2013), accessed March 12, 2015, econjournal.sites.yale.edu/articles/2/influence-us-postal-savings-system-bank-runs. 118. Sissman, “Development of the Postal,” 710. 119. United States Post Office, Annual Report of the Postmaster General, 1935 (Washington, DC: Government Printing Office, 1935), 28. 120. United States Post Office, Annual Report of the Postmaster General, 1941 (Washington, DC: Government Printing Office, 1941), 35. 121.

In order for your $100 to grow into $600, not everyone can ask for their money at the same time—it is not there. A bank only keeps a small reserve to pay out the occasional depositor. This is how banking works but only when people trust banks and allow them to hold on to their money. The only historically proven antidote to fear-induced runs is a government willing to insure bank deposits. Since the inception of deposit insurance, bank runs have been a rare historical phenomenon—so rare that you and I are willing to put all our money in a bank and forget about it. We don’t worry about who manages the bank or what they do with our money. Even if we hear on the news that our bank has started to lend large sums of money to piano-playing cats, which we think is a bad idea, we would not feel the need to show up at the bank the next morning to ask for all of our money back.

 

pages: 363 words: 107,817

Modernising Money: Why Our Monetary System Is Broken and How It Can Be Fixed by Andrew Jackson (economist), Ben Dyson (economist)

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bank run, banking crisis, banks create money, Basel III, Bretton Woods, call centre, capital controls, cashless society, central bank independence, credit crunch, David Graeber, debt deflation, double entry bookkeeping, eurozone crisis, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, Hyman Minsky, inflation targeting, informal economy, land reform, London Interbank Offered Rate, market bubble, market clearing, Martin Wolf, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Northern Rock, price stability, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, risk-adjusted returns, seigniorage, shareholder value, short selling, South Sea Bubble, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, unorthodox policies

Accordingly, banks no longer needed to worry about the three C’s: “When you securitize mortgage you don’t care about the risk, because you’re going to pass it off”. (Davidson, 2008) The ability to securitise loans means banks can make profits not by the quality of the loans they make, but by their quantity. The willingness of banks to lend to the subprime market was partially (and possibly predominantly) attributable to securitisation. Government guarantees & ‘too big to fail’ “Bank runs are a common feature of the extreme crises that have played a prominent role in monetary history. During a bank run, depositors rush to withdraw their deposits because they expect the bank to fail. In fact, the sudden withdrawals can force the bank to liquidate many of its assets at a loss and to fail. During a panic with many bank failures, there is a disruption of the monetary system and a reduction in production.” (Diamond & Dybvig, 1983) When a company becomes insolvent, creditors to that company will usually lose a proportion of their money.

Staying liquid Banks also run the risk of becoming insolvent through being unable to meet their liabilities as they fall due, even though their assets may be greater than their liabilities. In accounting terms, this is known as cashflow insolvency. In banking jargon it is reffered to as a ‘liquidity crisis’. A liquidity crisis can happen if there is a significant outflow of funds (central bank reserves) from a bank to other banks or to customers who are withdrawing cash. This process can happen very quickly, as in a bank run, or slowly if its liabilities are withdrawn slightly faster than its loan assets are repaid. If a bank becomes unable to settle its liabilities to either customers or to other banks, then it is again declared insolvent and will need to cease trading. Avoiding a liquidity crisis relies on a process known as ‘asset liability management’, which involves managing and predicting inflows and outflows to ensure that a bank is always able to make its payments as and when it needs to.

A liquidity ratio is similar, but allows banks to hold highly-liquid assets such as government bonds in place of cash and central bank reserves, with the idea being that bonds can easily be exchanged for cash and central bank reserves if customers are making higher than usual withdrawals from their accounts. In short, liquidity ratios and reserve ratios say, “What percentage of customers could withdraw their deposits simultaneously before the bank runs out of base money?” A reserve ratio or liquidity ratio of 10% would imply that the bank could suffer a withdrawal of up to 10% of its deposits before it would become illiquid and have to close its doors. In contrast, the capital or ‘capital reserves’ that are required by the Basel Capital Accords relate to the assets side of the balance sheet. Capital requirements say, in essence, “What percentage of our loans can default before we become insolvent?”

 

pages: 246 words: 74,341

Financial Fiasco: How America's Infatuation With Homeownership and Easy Money Created the Economic Crisis by Johan Norberg

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accounting loophole / creative accounting, bank run, banking crisis, Bernie Madoff, Black Swan, capital controls, central bank independence, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Brooks, diversification, financial deregulation, financial innovation, helicopter parent, Home mortgage interest deduction, housing crisis, Howard Zinn, Hyman Minsky, Isaac Newton, Joseph Schumpeter, Long Term Capital Management, market bubble, Martin Wolf, Mexican peso crisis / tequila crisis, millennium bug, moral hazard, mortgage tax deduction, Naomi Klein, new economy, Northern Rock, Own Your Own Home, price stability, Ronald Reagan, savings glut, short selling, Silicon Valley, South Sea Bubble, The Wealth of Nations by Adam Smith, too big to fail

Since investors themselves did not know what the packages contained, the "Aaa" label was what gave them their value. And now it turned out that most of them had been mislabeled. As if on command, investors stopped buying mortgage-backed securities. All the financial institutions and special companies whose business model was to take out short-term credit to keep their trade in securities going discovered that they could no longer renew their loans. It was a bank run. As it concerned the shadow banking sector, it did not involve actual crowds of depositors rushing to the bank to get their savings out before everybody else did, but the mechanism and the effect of causing the bank to go belly-up in the process were the same. All the special companies, conduits, and structured investment vehicles filled to the brim with mortgage-backed securities that the banks had placed off their balance sheets depended on regularly being able to renew short-term loans of maybe $1 billion, $10 billion, or $30 billion for maturities ranging from as much as nine months to as little as 24 hours.

Banks were forced to make huge commitments, and the law required them to hoard capital to cover those commitments, but the market was in no lending mood. In just a few moments, a stable bank could seem to be teetering on the brink of insolvency. Citigroup saw its balance sheet grow by $49 billion in a single day in December 2007. There was no other way out for the banks but to pull the emergency brake so that they could build up more capital, and several of them also started borrowing directly from the Fed. The drawn-out bank run can be said to have begun on August 9, 2007. That was when the French bank BNP Paribas took the unusual step of preventing investors from withdrawing money from three money-market funds invested in U.S. mortgagebacked securities. Only one week earlier, its head had made assurances that the bank's exposure to the subprime crisis was absolutely negligible, but now BNP explained that the collapse in prices made it impossible to assess the value of the funds.

Citigroup's Charles Prince (the man who stood accused of being unable to tell a CDO from a shopping list) found out for the first time at a board meeting in September 2007 that his bank was sitting on $43 billion in various types of mortgage-backed securities. He asked the person responsible whether this was a problem and was told that no major losses could be expected. Only two months later, however, the bank estimated its subprime losses at $10 billion. Prince chose to step down-taking $38 million in bonuses, stocks, and options with him. In September 2007, the United Kingdom was hit by a classic bank run taking place on real streets and squares. In scenes that the country had not witnessed for over 140 years, long lines of worried depositors wanting to withdraw their money were forming outside the branch offices of Northern Rock. This Newcastle bank had derived two-thirds of its financing from money-market loans, capable of being canceled at any time, and used the money for decadelong securitized mortgages whose value exceeded that of the actual homes.16 As Martin Wolf has concluded, government guarantees for the banking system meant that savers saw only the high rates of interest paid by Northern Rock, not the risks it was taking.

 

pages: 272 words: 64,626

Eat People: And Other Unapologetic Rules for Game-Changing Entrepreneurs by Andy Kessler

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23andMe, Andy Kessler, bank run, barriers to entry, Berlin Wall, British Empire, business process, California gold rush, carbon footprint, Cass Sunstein, cloud computing, collateralized debt obligation, collective bargaining, computer age, disintermediation, Eugene Fama: efficient market hypothesis, fiat currency, Firefox, Fractional reserve banking, George Gilder, Gordon Gekko, greed is good, income inequality, invisible hand, James Watt: steam engine, Jeff Bezos, job automation, Joseph Schumpeter, knowledge economy, knowledge worker, libertarian paternalism, low skilled workers, Mark Zuckerberg, McMansion, Netflix Prize, packet switching, personalized medicine, pets.com, prediction markets, pre–internet, profit motive, race to the bottom, Richard Thaler, risk tolerance, risk-adjusted returns, Silicon Valley, six sigma, Skype, social graph, Steve Jobs, The Wealth of Nations by Adam Smith, transcontinental railway, transfer pricing, Yogi Berra

One of the roles of the Federal Reserve is the lender of last resort, which they unfortunately learned after the stock market crash of 1929 and the bank runs that followed. Ten thousand banks failed, roughly 40 percent, and $2 billion in deposits were wiped out—30 percent of the money supply disappeared. So did a similar percentage of GDP, and unemployment hit 25 percent. You can see that lost money supply is not a good thing. So the other big change happened twenty years later, in 1933. The Federal Deposit Insurance Corporation (FDIC) was set up to insure depositors’ money, negating the desire for people to line up to get their money out at the first sign of a bank’s weakness. No more bank runs. Not many, anyway. (We can argue about whether the FDIC is really an insurance policy, as they undercharge banks for the privilege of insuring against bank runs, and you and I, the taxpayers, make up the difference.

(We can argue about whether the FDIC is really an insurance policy, as they undercharge banks for the privilege of insuring against bank runs, and you and I, the taxpayers, make up the difference. Still, the FDIC is a decent bargain. It’s a backstop to panics—bank run panics anyway!) As long as banks make prudent loans, which, as we’ve seen in 2008, is not the greatest assumption. Twin bargains. Twin safety nets for fractional reserve banking so we don’t have to go back to the stifling days of gold. The Federal Reserve allows banks to post assets in exchange for loans to redeem depositors, in effect making the Fed the lender of last resort to banks. And then there’s the FDIC, basically an insurance policy (up to $100,000 and sometimes $250,000) against bank runs, no matter how bad the bankers are at making loans. And who said banks are private companies? All of this still means the Federal Reserve has to figure out exactly how much money to create to fill the bucket representing population growth and productivity—an almost impossible task.

They might as well lend out ten times as much money as the gold held, figuring not all “depositors” would want their gold back at the same time. Money from nothing (and your checks for free). Sort of, anyway. This sleight of hand is called fractional reserve banking, and was an easy (if not a little sleazy, no?) way to increase money supply to, again, make room for productivity and wealth creation. But how much money? No one knows, which is why there were occasionally bank runs and panics and depressions that followed easy credit, one of the hazards of this flimsy system. Sixteen panics since 1812—it’s as American as apple pie! But banking did increase money supply beyond just how much gold could be extracted. In fact, since Adam and Eve, 160,000 tons of gold have been panned and mined from Mother Earth, enough to fill two Olympic-sized swimming pools. At $35 per ounce under the old gold standard, that comes to $180 billion in value, not nearly enough to support all the value created by entrepreneurs.

 

pages: 249 words: 66,383

House of Debt: How They (And You) Caused the Great Recession, and How We Can Prevent It From Happening Again by Atif Mian, Amir Sufi

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Andrei Shleifer, asset-backed security, balance sheet recession, bank run, banking crisis, Ben Bernanke: helicopter money, Carmen Reinhart, collapse of Lehman Brothers, debt deflation, Edward Glaeser, en.wikipedia.org, financial innovation, full employment, high net worth, Home mortgage interest deduction, housing crisis, Joseph Schumpeter, Kenneth Rogoff, liquidity trap, Long Term Capital Management, market bubble, Martin Wolf, moral hazard, mortgage debt, paradox of thrift, quantitative easing, Robert Shiller, Robert Shiller, school choice, shareholder value, the payments system, the scientific method, tulip mania, young professional

If the value of banking assets falls, spooked depositors may all demand their money when they sense the bank is in trouble—a bank run. Bank runs can lead to even healthy banks going under. For example, even a depositor in a healthy bank will “run” if he believes that other depositors are withdrawing their funds in a panic. The run dynamic is dangerous. It forces banks to sell assets at prices below market value. It can also damage the payment system of a country, which relies on bank deposits: when someone writes a check, it is cleared by shifting deposits from one bank to another. Businesses often pay their workers from deposit accounts. If the value of bank deposits is called into question, the entire payment system of a country may break down. It is a well-accepted axiom of banking regulation that the central bank must act as a “lender of last resort” to prevent bank runs. It can do so by explicitly insuring bank deposits, as the Federal Deposit Insurance Corporation (FDIC) does, or by lending freely to liquidity-constrained banks.

See also housing boom of 2000–2007 asset price collapses, 42–45, 70 austerity measures, 163 auto industry: sales rates in, 5–6; unemployment in, 61–62, 64–65 Bagehot Rule, 124 balance sheet recession, 194n5 bank bailouts, 121–34, 142, 151; FDIC loans in, 124; Federal Reserve programs in, 124–26, 154–57; protection of deposits in, 123–26, 129; protection of stakeholders in, 126–27, 131–34; Troubled Asset Relief Program (TARP) as, 136 bank crises, 7–9, 192n20; bank runs in, 123–26; current-account deficits in, 7–8; government protections in, 92–93, 119–29; household debt in, 8–9; IMF loans in, 92–95; real estate prices in, 7; short-term financing instruments in, 125; Spanish bankruptcy law and, 119–21, 184–85; stakeholders in, 121–23; stress in, 129, 130f. See also the Depression; Great Recession bank-lending view, 10–11, 31–35, 127–34; inflation in, 153–62; lowered interest rates in, 52–53; political power and, 131–34; refutation of, 127–30; risk-taking in, 177–78; small business concerns of, 128; unemployment in, 128–30 Bank of England, 162 bank reserves, 154–57, 160 bank runs, 123–26 bankruptcy, 119–23, 202n37, 203n44; mortgage cram-downs and, 146–48; student loans and, 167 behavioral biases view, 90–91, 197n18 Beim, David, 4–6 Ben-David, Itzhak, 139 Bender, Stefan, 69 Benson, Clea, 133–34 Bernanke, Ben, 78, 127, 132–33, 153, 157 Biden, Joseph, 146 Blinder, Alan, 193n1 borrowers: consumer spending of, 55, 140–42; declining income growth of, 79–80, 90; deflation and, 152–53; expansion of mortgage credit to, 75–91, 164–65; forgiveness practices for, 60, 135–51, 205n19; home equity loans of, 20, 86–91, 159; junior claims of, 18–19, 50; in the levered-losses framework, 50–52, 70–71, 134, 158–59, 170; lowered interest rates and, 52–53; as marginal borrowers, 76–80, 103–5, 198n18; moral hazard and, 149–51, 206n13; net worth of, 50.

If a bank’s short-term liabilities were all demanded at once, it would not be able call back the money it has lent out on a long-term basis. In other words, the mismatch in maturity makes banks vulnerable to a run. Even if a bank is fundamentally solvent, a run can make its failure self-fulfilling. A central bank can prevent self-fulfilling banking crises by providing liquidity (i.e., cash) to a bank to protect it from bank runs. Just the ability of a central bank to flood banks with cash may be sufficient to prevent runs from happening in the first place, because depositors then have faith that their money is protected. In the East Asian crisis, however, central banks couldn’t flood the banks with cash because it needed to be in U.S. dollars. Without the ability to print dollars, these central banks watched helplessly as the domestic banks and corporate sector went bankrupt as foreign investors fled.

 

pages: 430 words: 109,064

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown by Simon Johnson, James Kwak

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Andrei Shleifer, Asian financial crisis, asset-backed security, bank run, banking crisis, Bernie Madoff, Bonfire of the Vanities, bonus culture, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Edward Glaeser, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, financial intermediation, financial repression, fixed income, George Akerlof, Gordon Gekko, greed is good, Home mortgage interest deduction, Hyman Minsky, income per capita, interest rate derivative, interest rate swap, Kenneth Rogoff, laissez-faire capitalism, late fees, Long Term Capital Management, market bubble, market fundamentalism, Martin Wolf, moral hazard, mortgage tax deduction, Ponzi scheme, price stability, profit maximization, race to the bottom, regulatory arbitrage, rent-seeking, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, sovereign wealth fund, The Myth of the Rational Market, too big to fail, transaction costs, value at risk, yield curve

Bear Stearns was brought down by a modern-day bank run.13 On a proportional basis, it was more exposed to structured mortgage-backed securities than its rivals, and it was also highly dependent on short-term funding—cash that came from very short-term borrowing, much of it overnight.14 This meant that its creditors could refuse to roll over their loans from one day to the next and demand their money back instead. If that happened, there was no way Bear could pay them back, since many of its assets were illiquid; structured securities can be hard to sell on short notice, and selling them under pressure would cause their prices to collapse. If some creditors thought that this might happen, they would try to get their money out first, which would provoke other creditors to do the same, triggering a bank run as everyone scrambled to avoid being last in line.

The Glass-Steagall Act separated commercial banking from investment banking to prevent commercial banks from being “infected” by the risky activities of investment banks. (One theory at the time—since largely discredited—was that this infection had weakened commercial banks and helped cause the Depression.)100 As a result, J.P. Morgan was forced to spin off its investment banking operations, which became Morgan Stanley. Commercial banks were protected from panic-induced bank runs by the Federal Deposit Insurance Corporation (FDIC), but had to accept tight federal regulation in return. The governance of the Federal Reserve was also reformed in the 1930s, strengthening the hand of presidential appointees and weakening the relative power of banks. The system that took form after 1933, in which banks gained government protection in exchange for accepting strict regulation, was the basis for half a century of financial stability—the longest in American history.

As the long boom of the 1990s continued and the stock market continued to go up, LTCM soon faded into memory. U.S. policymakers did draw a number of important lessons from the emerging market crises, outlined by Treasury Secretary Larry Summers in a major lecture at the 2000 conference of the American Economics Association.51 Financial crises were the result of fundamental policy weaknesses: “Bank runs or their international analogues are not driven by sunspots: their likelihood is driven and determined by the extent of fundamental weaknesses.” It was more important to look at the soundness of the financial system than to simply count the total amount of debt: “When well-capitalized and supervised banks, effective corporate governance and bankruptcy codes, and credible means of contract enforcement, along with other elements of a strong financial system, are present, significant amounts of debt will be sustainable.

 

pages: 311 words: 99,699

Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe by Gillian Tett

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accounting loophole / creative accounting, asset-backed security, bank run, banking crisis, Black-Scholes formula, Bretton Woods, business climate, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, easy for humans, difficult for computers, financial innovation, fixed income, housing crisis, interest rate derivative, interest rate swap, locking in a profit, Long Term Capital Management, McMansion, mortgage debt, North Sea oil, Northern Rock, Renaissance Technologies, risk tolerance, Robert Shiller, Robert Shiller, short selling, sovereign wealth fund, statistical model, The Great Moderation, too big to fail, value at risk, yield curve

Within minutes of the BBC bulletin, consumers began logging on to Northern Rock’s website and withdrawing their cash. The website then crashed, fueling panic. The next morning, Northern Rock savers flocked to the bank’s branch offices, and pictures of terrified savers in a long line in front of the bank beamed onto computers, television screens, BlackBerries, and mobile phones around the world. By midmorning, a full-scale bank run was under way. Never before had so many terrified consumers and investors seen a bank run in action, in real time. Technology was helping to spread the panic. What brought Northern Rock down was another variant of the woes that had beset IKB and Cairn. At the turn of the century, the bank had embraced securitization with a vengeance, raising funds by selling masses of mortgage-backed bonds to investors all over the world. By 2007, less than a quarter of Northern Rock’s funding came from retail deposits, with the rest raised by securitization.

HG6024.U6T48 2009 332.660973—dc22 2009005127 ISBN-13: 978-1-4391-0075-2 ISBN-10: 1-4391-0075-6 Visit us on the Web: http://www.SimonandSchuster.com For Helen and Analiese CONTENTS PREFACE PART 1: INNOVATION 1 THE DERIVATIVES DREAM 2 DANCING AROUND THE REGULATORS 3 THE DREAM TEAM 4 THE CUFFS COME OFF 5 MERGER MANIA PART 2: PERVERSION 6 INNOVATION UNLEASHED 7 MR. DIMON TAKES CHARGE 8 RISKY BUSINESS 9 LEVERAGING LUNACY 10 TREMORS PART 3: DISASTER 11 FIRST FAILURES 12 PANIC TAKES HOLD 13 BANK RUN 14 BEAR BLOWS UP 15 FREE FALL EPILOGUE NOTES GLOSSARY ACKNOWLEDGMENTS ABOUT THE AUTHOR PREFACE Were the bankers mad? Were they evil? Or were they simply grotesquely greedy? To be sure, there have been plenty of booms and busts in history; market crashes are almost as old as the invention of money itself. But this crisis stands out due to its sheer size; economists estimate that total losses could end up being $2 trillion to $4 trillion.

That made Western investment banks eager to court the IKB officials. At the ESF conference in Barcelona, for example, American brokers and City bankers swarmed around the Germans, in the hope of selling them more bonds. However, as Winters stood in Geneva International in July, it was clear that something had gone badly wrong with the IKB funds. He called his traders in London. “What’s going on?” he asked. “There’s something like a bank run starting in the commercial paper markets,” a trader replied. That news was alarming. Until that point, the commercial paper market had been deemed one of the safest, and dullest, corners of the financial world. It was where General Electric and other blue-chip giants raised the short-term funds that they needed for day-to-day operations. It was also where solid, risk-averse investors tended to put their cash as an alternative to placing their money on deposit at a bank.

 

pages: 460 words: 122,556

The End of Wall Street by Roger Lowenstein

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Asian financial crisis, asset-backed security, bank run, banking crisis, Berlin Wall, Bernie Madoff, Black Swan, Brownian motion, Carmen Reinhart, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, fear of failure, financial deregulation, fixed income, high net worth, Hyman Minsky, interest rate derivative, invisible hand, Kenneth Rogoff, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, Martin Wolf, moral hazard, mortgage debt, Northern Rock, Ponzi scheme, profit motive, race to the bottom, risk tolerance, Ronald Reagan, savings glut, short selling, sovereign wealth fund, statistical model, the payments system, too big to fail, tulip mania, Y2K

Similar arguments applied to deregulation of airlines, trucking, and other industries. Even in financial markets, some slackening of the rules was appropriate—as in, for instance, the liberalization that permitted interstate banking. But deregulators made two mistakes. One was failing to recognize that financial markets were more fragile than others, more vulnerable to panics and, indeed, more vital to the economy overall. Airline failures are rarely front-page news; bank runs are. The other mistake was failing to see that the relative financial stability of the postwar era was largely a result of the regulation put in place during the New Deal and after. With the turn toward market-driven economies in the 1980s, it was thought that markets had outgrown the ancient perils that arise from speculative frenzy, excessive borrowing, and greed—when in fact, Washington had been holding them in check.

The Chinese held more than $500 billion of GSE debt—presumably, more than they could sell—but this only heightened the pressure on Paulson to protect Fannie’s and Freddie’s credit.15 If the agencies failed, a run on Treasuries (the government’s paper) would follow. As Fannie’s and Freddie’s stocks were being battered, trouble was flaring at IndyMac, the Pasadena bank spun off from Countrywide. IndyMac, which had specialized in Alt-A loans, had been left holding thousands of shaky mortgages when the securitization market shut down. From late June to early July, Indy was hit with a bank run. Depositors withdrew $1.3 billion, about $100 million a day. On July 11, two months after the bank’s chairman, Michael Perry, had assured investors that his company was well capitalized, the Office of Thrift Supervision seized Indy—the second biggest bank to fail in U.S. history, trailing only Continental Illinois in 1984. IndyMac’s collapse socked the FDIC with an astronomical $10.7 billion in insurance costs, and enraged Sheila Bair, FDIC’s chairwoman. 16 She resolved that regulators would move sooner, and more aggressively, against weak banks in the future.

Premiums for Goldman, a perfectly solvent firm, surged from a negligible sum to $150,000.6 Some of this was rational; the risk had increased. But credit was effectively being rationed by rank speculators. Worse, some of those purchasing “insurance” were short-sellers with an interest in seeing insurance prices soar. Because rising prices in the swap market were contagious, they contributed to fears of systemic weakness. They were not unlike the bank runs that fed the gloom of the 1930s. A junior Lehman executive, reflecting on rising swap rates, the pressure from short-sellers, and tightening credit conditions in general, sensed “the world falling apart.” The deepening woes of Fannie and Freddie further darkened the mood at Lehman—as did the nonstop articles speculating on the firm’s demise, which felt to AIG’s Willumstad like a tourniquet suffocating his company, too.

 

pages: 381 words: 101,559

Currency Wars: The Making of the Next Gobal Crisis by James Rickards

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Asian financial crisis, bank run, Benoit Mandelbrot, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, borderless world, Bretton Woods, BRICs, British Empire, business climate, capital controls, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, Deng Xiaoping, diversification, diversified portfolio, Fall of the Berlin Wall, family office, financial innovation, floating exchange rates, full employment, game design, German hyperinflation, Gini coefficient, global rebalancing, global reserve currency, high net worth, income inequality, interest rate derivative, Kenneth Rogoff, labour mobility, laissez-faire capitalism, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, money: store of value / unit of account / medium of exchange, Network effects, New Journalism, Nixon shock, offshore financial centre, oil shock, open economy, paradox of thrift, price mechanism, price stability, private sector deleveraging, quantitative easing, race to the bottom, RAND corporation, rent-seeking, reserve currency, Ronald Reagan, sovereign wealth fund, special drawing rights, special economic zone, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, time value of money, too big to fail, value at risk, War on Poverty, Washington Consensus

When Knickerbocker’s involvement in the scheme came to light, a classic run on the bank commenced. If the Knickerbocker revelations had occurred in calmer markets, they might not have triggered such a panicked response, but the market was already nervous and volatile after massive losses caused by the 1906 San Francisco earthquake. The failure of the Knickerbocker Trust was just the beginning of a more general loss of confidence, which led to another stock market crash, even further bank runs, and finally a full-scale liquidity crisis and threat to the stability of the financial system as a whole. This threat was stemmed only by collective action of the leading bankers of the day in the form of a private financial rescue organized by J. P. Morgan. In one of the most famous episodes in U.S. financial history, Morgan summoned the financiers to his town house in the Murray Hill neighborhood of Manhattan and would not allow them to leave until they had hammered out a rescue plan involving specific financial commitments by each one intended to calm the markets.

Leading English banks had made leveraged investments in illiquid assets funded with short-term liabilities, exactly the type of investing that destroyed Lehman Brothers in 2008. As those liabilities came due, foreign creditors converted their sterling claims into gold that soon left England headed for the United States or France or some other gold power not yet feeling the full impact of the crisis. With the outflow of gold becoming acute and the pressures of the bank run threatening to destroy major banks in the City of London, England went off the gold standard on September 21, 1931. Almost immediately sterling fell sharply against the dollar and continued dropping, falling 30 percent in a matter of months. Many other countries, including Japan, the Scandinavian nations and members of the British Commonwealth, also left the gold standard and received the short-run benefits of devaluation.

In November 1932, Franklin D. Roosevelt was elected president to replace Herbert Hoover, whose entire term had been consumed by a stock bubble, a crash and then the Great Depression itself. However, Roosevelt would not be sworn in as president until March 1933, and in the four months between election and inauguration the situation deteriorated precipitously, with widespread U.S. bank failures and bank runs. Millions of Americans withdrew cash from the banks and stuffed it in drawers or mattresses, while others lost their entire life savings because they did not act in time. By Roosevelt’s inauguration, Americans had lost faith in so many institutions that what little hope remained seemed embodied in Roosevelt himself. On March 6, 1933, two days after his inauguration, Roosevelt used emergency powers to announce a bank holiday that would close all banks in the United States.

 

pages: 576 words: 105,655

Austerity: The History of a Dangerous Idea by Mark Blyth

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accounting loophole / creative accounting, balance sheet recession, bank run, banking crisis, Black Swan, Bretton Woods, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, deindustrialization, disintermediation, diversification, en.wikipedia.org, ending welfare as we know it, Eugene Fama: efficient market hypothesis, eurozone crisis, financial repression, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, Gini coefficient, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, interest rate swap, invisible hand, Irish property bubble, Joseph Schumpeter, Kenneth Rogoff, liquidationism / Banker’s doctrine / the Treasury view, Long Term Capital Management, market bubble, market clearing, Martin Wolf, moral hazard, mortgage debt, mortgage tax deduction, Occupy movement, offshore financial centre, paradox of thrift, price stability, quantitative easing, rent-seeking, reserve currency, road to serfdom, savings glut, short selling, structural adjustment programs, The Great Moderation, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, unorthodox policies, value at risk, Washington Consensus

It would be hugely impractical for big businesses to truck in enormous amounts of cash every weekend to pay their employees out of retained earnings held at their local bank. So companies borrow and lend money to each other over very short periods at very low interest rates, typically swapping assets for cash and then repurchasing those assets the next day for a fee—hence “sale” and “repurchase”—or “repo.” It is cheaper than borrowing from the local bank and doesn’t involve fleets of armored trucks. What happened in 2007 and 2008 was a bank run through this repo market.5 A bank run occurs when all the depositors in a bank want their cash back at the same time and the bank doesn’t have enough cash on hand to give it to them. When this happens, banks either borrow money to stay liquid and halt the panic or they go under. The repo market emerged in the 1980s when traditional banks lost market share because of a process called “disintermediation.”6 Banks, as intermediaries, traditionally sit in the middle of someone else’s prospective business, connecting borrowers and lenders, for example, and charging fees for doing so.

Again, I stress that these are quintessentially private-sector phenomena. I do this so that I can ask one more question as a setup. If all the trouble was generated in the private sector, why do so many people blame the state for the crisis and see cuts to state spending as the way out of a private-sector mess? Answering that question is what concerns us in the rest of this chapter. The Generator: Repo Markets and Bank Runs The repo market is a part of what is called the “shadow banking” system: “shadow,” since its activities support and often replicate those of the normal banks, and “banking” in that it provides financial services to both the normal (regulated) banks and the real economy. Take paychecks, for example. It would be hugely impractical for big businesses to truck in enormous amounts of cash every weekend to pay their employees out of retained earnings held at their local bank.

This had the effect of reversing the flow of capital to Europe as US capital came home to take advantage of these higher interest rates, which unexpectedly further stoked the stock market boom.15 After all, why put your money in Germany when you can make 15 percent buying shares in an investment trust and 7 percent in a bank deposit in the USA? The resulting capital flight placed enormous pressure on the German economy, which responded with ever-stricter austerity policies, especially, as we shall see, under Chancellor Brüning in 1930–1931. Deprived of external liquidity—all the money had gone back to the United States—bank runs in Austria and Germany were met with ever-tighter austerity policies in exchange for more loans (that failed to materialize) to stave off the inevitable default. Eventually, and tragically, as loans dried up tariffs rose, currencies were devalued, and the postwar recession became the Great Depression. Beyond this overview of why austerity failed on a macro level, what is of most interest to us here is how different countries’ austerity policies fared on a micro level during this crisis.

 

pages: 708 words: 196,859

Lords of Finance: The Bankers Who Broke the World by Liaquat Ahamed

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Albert Einstein, anti-communist, bank run, banking crisis, Bretton Woods, British Empire, capital controls, central bank independence, centre right, credit crunch, currency manipulation / currency intervention, Etonian, full employment, German hyperinflation, index card, invisible hand, Lao Tzu, large denomination, Long Term Capital Management, margin call, market bubble, Mexican peso crisis / tequila crisis, mobile money, moral hazard, new economy, open economy, Plutocrats, plutocrats, price stability, purchasing power parity, pushing on a string, rolodex, the market place

The central banks had powerful tools to deal with these outbursts—specifically their authority to print currency and their ability to marshal their large concentrated holdings of gold. But for all of this armory of instruments, ultimately the goal of a central bank in a financial crisis was both very simple and very elusive—to reestablish trust in banks. Such breakdowns are not some historical curiosity. As I write this in October 2008, the world is in the middle of one such panic—the most severe for seventy-five years, since the bank runs of 1931-1933 that feature so prominently in the last few chapters of this book. The credit markets are frozen, financial institutions are hoarding cash, banks are going under or being taken over by the week, stock markets are crumbling. Nothing brings home the fragility of the banking system or the potency of a financial crisis more vividly than writing about these issues from the eye of the storm.

Officials at the Bronx branch tried to convince the exigent depositor that he should hold on to his stock, that even at current prices it remained an excellent investment. No doubt irritated at this obvious attempt to renege on a clear promise, he stormed out and began reporting that the bank was in trouble. By the afternoon, a small horde of depositors had begun lining up outside the branch’s tiny neoclassical limestone building to withdraw their savings before closing time. Until now, despite the Depression, there had been no bank runs in New York, and soon a crowd of twenty thousand curious bystanders had gathered to watch. As the anxious depositors became restless, a squad of mounted police had to be sent in to control them and several customers were arrested; and when the mob became frantic, the police charged the crowd with their horses. The Bank of United States had fifty-seven branches across the four larger boroughs of New York, and over four hundred thousand individual depositors, more than any other bank in the country.

He would testify later that “I told them that the Bank of United States occupied a rather unique position in New York City, that in point of people served it was probably the largest bank in the city and that its closing might affect a large number of smaller banks and that I was afraid that it would be the spark that would ignite the whole city.” Broderick reminded the grandees that only two or three weeks before “they had rescued two of the largest private bankers in the city.” One of them was Kidder Peabody, an investment bank run by Boston Brahmins, founded in 1865, which as result of the crash and of subsequent withdrawals of deposits by, among others, the government of Italy, had had to be bailed out in 1930 with $15 million from J. P. Morgan and Chase. Though the meeting continued into the early hours of the morning, he was unable to persuade the few recalcitrants to change their mind. The Fed, believing that it could throw a ring fence around the BUS and prevent its troubles from spreading, decided to close the bank’s doors the next morning.

 

pages: 543 words: 147,357

Them And Us: Politics, Greed And Inequality - Why We Need A Fair Society by Will Hutton

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Andrei Shleifer, asset-backed security, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, capital controls, carbon footprint, Carmen Reinhart, Cass Sunstein, centre right, choice architecture, cloud computing, collective bargaining, conceptual framework, Corn Laws, corporate governance, credit crunch, Credit Default Swap, debt deflation, decarbonisation, Deng Xiaoping, discovery of DNA, discovery of the americas, discrete time, diversification, double helix, Edward Glaeser, financial deregulation, financial innovation, financial intermediation, first-past-the-post, floating exchange rates, Francis Fukuyama: the end of history, Frank Levy and Richard Murnane: The New Division of Labor, full employment, George Akerlof, Gini coefficient, global supply chain, Growth in a Time of Debt, Hyman Minsky, I think there is a world market for maybe five computers, income inequality, inflation targeting, interest rate swap, invisible hand, Isaac Newton, James Dyson, James Watt: steam engine, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, knowledge worker, labour market flexibility, Long Term Capital Management, Louis Pasteur, low-wage service sector, mandelbrot fractal, margin call, market fundamentalism, Martin Wolf, means of production, Mikhail Gorbachev, millennium bug, moral hazard, mortgage debt, new economy, Northern Rock, offshore financial centre, open economy, Plutocrats, plutocrats, price discrimination, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, railway mania, random walk, rent-seeking, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, Rory Sutherland, shareholder value, short selling, Silicon Valley, Skype, South Sea Bubble, Steve Jobs, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, the scientific method, The Wealth of Nations by Adam Smith, too big to fail, unpaid internship, value at risk, Washington Consensus, working poor, éminence grise

Britain and the United States had presided over the creation of a twenty-first-century banking system that had all the characteristics of unregulated commercial banking in the nineteenth century. Almost inevitably, the consequence was the same: a series of terrifying bank runs. This time, though, it was not ordinary savers stampeding to withdraw their cash: it was professionals and institutions, who moved much more quickly, violently and vastly. Bankers joke that retail customers are more likely to divorce their partner than switch their bank, and it takes the imminent threat of catastrophe to make them flood to the cashiers to withdraw their deposits. Professionals have always been much more trigger-happy. The blight that hit Northern Rock, the American investment banks, RBS and HBOS – and very nearly did for both Citigroup and Bank of America – was nothing less than a nineteenth-century-style bank run in the twenty-first-century wholesale markets. It happened for all the same reasons and had the same threat of contagion from bad banks to good.22 The system had grown gargantuan, with a scale of borrowing short to lend long on assets of dubious quality that was mind-boggling.

An IMF paper reports that young people growing up in recessions are much more fatalistic than others, believing that effort and work are far less important in generating results than having the luck to live in good times.7 Bank crashes can even damage health directly. A study at Cambridge University found that they increase the risk of death from stress and worry.8 The customers who tried to withdraw cash from Northern Rock, Britain’s first bank run for more than a century, experienced a similar level of stress to victims of an earthquake. The capitalism that Britain developed and which crashed so spectacularly has a lot to answer for. To date, though, it has hardly even been asked any questions, let alone provided any answers. A wounded society The unbalanced structure of economic growth over the last decade has fed straight through to a disastrous social geography, bypassing the least advantaged and rewarding the wealthy.

If every depositor simultaneously asked for their money back, the bank would have to recall every loan, but some of the creditors would certainly be unable to pay immediately, which would leave the bank insolvent. In reality, though, all depositors will not ask for their money back simultaneously, because they will not all need it at once. This assumption is the foundation of banking. However, should depositors lose confidence in a bank’s capacity to meet their demands, they may well all try to withdraw their money at the same time. This is what happens in a bank run. Banks are therefore pulled two ways: to be ultra-conservative in order to maintain depositors’ confidence, and the tremendous financial temptation, and commercial pressure, to be less conservative. If they can build up a position of leveraged lending to a portfolio of borrowers, especially in a class of assets that are appreciating in value, there are fortunes to be made for both financiers and their shareholders.

 

pages: 524 words: 143,993

The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis by Martin Wolf

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air freight, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, Bretton Woods, call centre, capital asset pricing model, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, deglobalization, Deng Xiaoping, diversification, double entry bookkeeping, en.wikipedia.org, Erik Brynjolfsson, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, floating exchange rates, forward guidance, Fractional reserve banking, full employment, global rebalancing, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, inflation targeting, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, Richard Feynman, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tyler Cowen: Great Stagnation, very high income, winner-take-all economy

That should limit unrest as well as reducing the currency collapse and inflationary upsurge. In either case, a big challenge would be to manage the contagion. An exit, particularly a disorderly one, would surely trigger bank runs and capital flight from other members. It could also cause collapses in the prices of financial and other assets. A flight to safety, to Germany or beyond the Eurozone, would occur. A decisive response from the Eurozone would be required to halt the contagion. The ECB would need to act as a lender of last resort on an unlimited scale, replacing money taken out in bank runs. Interest rates on sovereign debt would need to be capped. Above all, the commitment to keep the rest of the Eurozone together would have to be reinforced. The Eurozone either is an irrevocable currency union or it is not.

The programme for Cyprus had two significant features: for the first time, it imposed losses on bank creditors, notably including depositors (100 per cent losses on amounts above €100,000 in the now closed Laiki Bank and 60 per cent losses on amounts over €100,000 in the larger Bank of Cyprus), many of whom were, not coincidentally, foreign, particularly Russian; and, no less important, it inflicted controls on transfers of euros outside the country. It became even clearer than before that some euros were more equal than others. A euro deposited in a dodgy bank backed by a weak sovereign was and is not the same as a euro deposited in a solid bank supported by a strong sovereign.18 This makes the Eurozone structurally vulnerable to bank runs, since it obviously makes sense to move accounts from banks backed by weak sovereigns to banks backed by creditworthy ones, particularly at a time of crisis. It is also why informed observers concluded that some kind of banking union was essential if the Eurozone was to survive in the long run. In 2011 a far more significant event occurred than this set of crises in small countries. Spain and Italy, two far larger economies, fell into similar financial difficulty, a remarkably dangerous turn of events.

By external balance, we mean that the economy has a sustainable external position – net trade or net capital flows (these just being two sides of the accounts, since net inflows of capital finance current-account deficits): a sustainable deficit is one that can be financed on affordable terms indefinitely. If the required net inflow of foreign financing is too large, financing will become increasingly expensive and may stop altogether, possibly suddenly. That is what happened to Greece in 2010, as was noted in Chapter Two above. A ‘sudden stop’ is the consequence of a collective decision by investors that deficits are indeed unsustainable: a stop has the characteristics of a bank run, since the decision by individual investors to withdraw funding is triggered by the perception that others are doing so. ‘Sustainability’ is, therefore, ultimately a subjective, not an objective, phenomenon. As Hamlet tells us, ‘There is nothing either good or bad, but thinking makes it so.’ Unfortunately and crucially, external sustainability is asymmetrical. It is possible for a country to run a large current-account surplus and so accumulate net claims on the rest of the world virtually without limit.

 

pages: 261 words: 103,244

Economists and the Powerful by Norbert Haring, Norbert H. Ring, Niall Douglas

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accounting loophole / creative accounting, Affordable Care Act / Obamacare, Albert Einstein, asset allocation, bank run, barriers to entry, Basel III, Bernie Madoff, British Empire, central bank independence, collective bargaining, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, diversified portfolio, financial deregulation, George Akerlof, illegal immigration, income inequality, inflation targeting, Jean Tirole, job satisfaction, Joseph Schumpeter, knowledge worker, labour market flexibility, law of one price, Long Term Capital Management, low skilled workers, market bubble, market clearing, market fundamentalism, means of production, minimum wage unemployment, moral hazard, new economy, obamacare, open economy, pension reform, Ponzi scheme, price stability, principal–agent problem, profit maximization, purchasing power parity, Renaissance Technologies, rolodex, Sergey Aleynikov, shareholder value, short selling, Steve Jobs, The Chicago School, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, ultimatum game, union organizing, working-age population, World Values Survey

In the euro area, the minimum reserve requirement was cut from an already ridiculous rate of 2 percent to 1 percent in January 2012, and in the UK it has long been abolished altogether such that British banks can decide for themselves how much cash and central bank reserves they want to keep as a safety margin to satisfy customers’ demand for cash. The reserve requirement determines how much the banks can expose themselves – or in practice, the public purse – to the risk of a bank run. The lower the reserves in proportion to the money that customers could withdraw at any time, the higher the risk of a bank run. This does not only affect the banks with the lowest reserves. If the reserve requirement is low, the banking system as a whole has low reserves in relation to potential withdrawals of cash. This is why the problems of any significant bank routinely threaten to put the entire financial system at risk. If customers of one bank get worried that they might not get their money back, customers of all other banks have reason to run to their bank before others have the same idea.

In fact, the first bank that failed at the start of the subprime crisis in 2007 was the small German bank IKB. The government rescued it, at great cost to taxpayers, based on the argument that a bank failure would damage the public’s trust in the banking system. As government-sponsored depositor insurance systems, central banks and the prospect of bailout packages in times of need insure the banks against a bank run, a low reserve requirement is a superb MONEY IS POWER 83 deal for private banks. Using their influence, they made sure that in Europe minimum reserve requirements were continuously reduced in the last decades of the twentieth century. In the US, they engineered policies so that the reserve requirement would cover less and less of the financial sector’s money creation activities. The goal of the operation was usually cast as improving the international competitiveness of the banks of the respective nations or as increasing the attractiveness of the respective financial centers.

He also set up a bank in New York to benefit from the privileged position of a central reserve city bank as well as several national banks, either personally or through his associates. Chase’s successor Hugh McCulloch extended Cooke’s monopoly. He was a close friend of Cooke’s. When McCulloch left the Treasury, he became head of Cooke’s London office. The result of the new system was a great expansion of the number of banks and of deposits but also, in short order, a series of financial crises. There were panics and bank runs in 1873, 1884, 1893 and 1907 (Rothbard 1985/2008). As a reaction to these crises, the Federal Reserve System was created in 1913 upon bankers’ initiative. At a secret meeting at Jekyll Island, Georgia in December 1910, they hammered out the essential features of the new Federal Reserve System. Bankers representing the interests of Rockefeller, J.P. Morgan and Kuhn, Loeb & Company, the most powerful institutions of the time, dominated the meeting.

 

pages: 484 words: 136,735

Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis by Anatole Kaletsky

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bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Black Swan, bonus culture, Bretton Woods, BRICs, Carmen Reinhart, cognitive dissonance, collapse of Lehman Brothers, Corn Laws, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, Edward Glaeser, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, F. W. de Klerk, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, global rebalancing, Hyman Minsky, income inequality, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Rogoff, laissez-faire capitalism, Long Term Capital Management, mandelbrot fractal, market design, market fundamentalism, Martin Wolf, moral hazard, mortgage debt, new economy, Northern Rock, offshore financial centre, oil shock, paradox of thrift, peak oil, pets.com, Ponzi scheme, post-industrial society, price stability, profit maximization, profit motive, quantitative easing, Ralph Waldo Emerson, random walk, rent-seeking, reserve currency, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, statistical model, The Chicago School, The Great Moderation, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, Washington Consensus

It was after Paulson turned up at the Senate Banking Committee on the morning of September 23 and proved unable to explain his inchoate roundabout scheme that the worst of the bank runs started. Within a week of this fiasco Congress had voted down the first attempt at TARP funding, triggering the biggest-ever daily fall on Wall Street in terms of points, Washington Mutual had collapsed, the HBOS-Lloyds merger had effectively unraveled, threatening the failure of Britain’s entire financial system, all the banks in Iceland had been nationalized, and the German government had been forced to throw a €35 billion ($50 billion) lifeline to Hypo RE, the country’s biggest commercial property lender. With each passing day, the panic spread to new countries and new institutions, but there was nothing irrational about it. The series of bank runs that almost destroyed the world economy were perfectly reasonable responses to the self-destructive actions of the U.S.

First and foremost, he or she would realize that at a time of crisis all banks depend on some kind of implicit guarantee, from the government or from a quasi-public institution. Because no bank has enough ready cash to repay its depositors if they all decide simultaneously to withdraw their funds, there are only two ways to restore confidence among depositors once they start worrying about the loss of their money in a bank run. Either the bank must be able to raise a large amount of capital quickly to prove to its depositors that it remains solvent, or the depositors must be offered an unconditional guarantee from another institution whose solvency is beyond question. When an individual bank suffers, takeover by a bigger institution is often enough. But with a run on the entire banking system, the only plausible guarantors are the government, which can tax the whole nation, or the central bank, which can print money without limit to back its guarantees.19 Paulson inadvertently closed off both of these escape routes in the days just before and after September 15.

Through financial misjudgments motivated largely by a naïve faith in free markets, Paulson eliminated the possibility of any U.S. financial institution raising additional private capital. Then, partly through ideological dogmatism and partly political timidity, he ruled out the only viable alternative, which was temporarily to offer all American banks unlimited government guarantees. The almost inevitable result was a run on every major bank and financial institution, first in America and then around the world. And after this generalized bank run had started, the only possible outcome was the ideological U-turn that occurred in the week of October 6, 2008, when the Irish, Greek, and Danish governments, followed by the British government, then the French and German governments, and finally the U.S. Treasury, gave the temporary guarantees that they could and should have offered on September 15. That was the week the purely financial crisis effectively ended.

 

pages: 701 words: 199,010

The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal by Ludwig B. Chincarini

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affirmative action, asset-backed security, automated trading system, bank run, banking crisis, Basel III, Bernie Madoff, Black-Scholes formula, buttonwood tree, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, corporate governance, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, discounted cash flows, diversification, diversified portfolio, family office, financial innovation, financial intermediation, fixed income, Flash crash, full employment, Gini coefficient, high net worth, hindsight bias, housing crisis, implied volatility, income inequality, interest rate derivative, interest rate swap, labour mobility, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low skilled workers, margin call, market design, market fundamentalism, merger arbitrage, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, Northern Rock, Occupy movement, oil shock, price stability, quantitative easing, quantitative hedge fund, quantitative trading / quantitative finance, Ralph Waldo Emerson, regulatory arbitrage, Renaissance Technologies, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, Sharpe ratio, short selling, sovereign wealth fund, speech recognition, statistical arbitrage, statistical model, systematic trading, The Great Moderation, too big to fail, transaction costs, value at risk, yield curve, zero-coupon bond

If depositors incorrectly think that a bank is in trouble, their deposit withdrawals will create a bank run and push even a very healthy bank toward failure.45 On March 6, 1933, U.S. President Franklin D. Roosevelt called for a “bank holiday” and closed every bank in the country. They remained closed until Department of the Treasury officials could inspect each institution’s ledgers. Banks in viable financial condition were primed with Treasury money and permitted to do business again. Those in marginal condition were kept closed until they could be restored to soundness. Numerous banks that had been poorly run remained closed forever. This was one way to stop the endless cycle of banking system destruction. The Federal Deposit Insurance Corporation (FDIC) was one regulatory response to the bank runs of the 1930s. Established in the Banking Act of 1933, it insured bank deposits so that depositors would not worry about losing their savings to bank failures.46 Investment banks do not have this guarantee on their customer deposits.

Paulson did not call Brown, but did call Chancellor of the Exchequer Alistair Darling. This deal, and perhaps a deal with another suitor, would have been much more likely had the U.S. guaranteed it. 45. Mozilo, Countrywide’s CEO, pointed to a Los Angeles Times article that caused depositor panic. The next day depositors withdrew $8 billion from the bank. In nine days, depositors withdrew $16.7 billion, forcing the bank out of business. 46. This didn’t prevent bank runs in 2008, partly because many depositors had more than the $100,000 account limit and partly because, even with the guarantee, people were nervous or didn’t understand the rules. The FDIC subsequently raised the account limit to $250,000. 47. Transparent, stress-tested financial statements detailing Lehman’s exposure would have helped a great deal in the weeks leading up to Lehman’s collapse. For instance, financial statements could have contained scenario tests, such as the effects on Lehman’s portfolio if real estate prices drop by 30% in all of markets and subsequent defaults are 10%.

January and February are typically good for fixed-income relative-value funds, because banks window-dress their balance sheets near the fiscal year’s end in November and December.2 The housing crisis made 2008 an exception. JWMP started the year with its worst-ever monthly return: −4.14% in January 2008. February was even worse, at −5.25%. By the end of February, JWMP began to unwind some of its risk. The Bear and the Gorilla Attack Then came the institutional bank run on Bear Stearns in March 2008. Bear Stearns, a major prime broker and liquidity provider for hedge funds, was heading for bankruptcy. Dimon and J.P. Morgan bought it at the fire sale price of $2 per share.3 That month, JWMP lost 24.8% of its fund, a loss that was eight times more than its previous worst monthly loss. Even with a new, more conservative risk management system, the LTCM crew was getting pulverized again.

 

pages: 348 words: 99,383

The Financial Crisis and the Free Market Cure: Why Pure Capitalism Is the World Economy's Only Hope by John A. Allison

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Affordable Care Act / Obamacare, bank run, banking crisis, Bernie Madoff, clean water, collateralized debt obligation, correlation does not imply causation, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, disintermediation, fiat currency, financial innovation, Fractional reserve banking, full employment, high net worth, housing crisis, invisible hand, life extension, low skilled workers, market bubble, market clearing, minimum wage unemployment, moral hazard, obamacare, price mechanism, price stability, profit maximization, quantitative easing, race to the bottom, reserve currency, risk/return, Robert Shiller, Robert Shiller, The Bell Curve by Richard Herrnstein and Charles Murray, too big to fail, transaction costs, yield curve

In Chapter 18, on solutions to the financial crisis, I will share with you some ideas for dealing with this issue without losing the benefits of magnifying the economic efficiency of intermediate-size investments and small savings that banks provide. The Federal Reserve and FDIC insurance were both created to deal with the issues associated with the nature of fractional reserve banking. In the short term, these “solutions” help; in the long term, they make the problem far, far worse. FDIC insurance primarily reduces the short-term risk of bank runs because depositors perceive their deposits to be insured by the federal government. However, I previously described the fact that FDIC insurance substantially increases the credit and liquidity risk that banks take by eliminating market discipline. Based on my long-term observation of the behavior of bank executives (human nature), the existence of FDIC insurance changes the risk/return trade-offs so significantly that in the good times (when bad loans are made), bankers take risks that they would never take in a free market.

Uninsured depositors do get paid in full on the portion of their deposits that is insured (theoretically, $100,000 is insured, but often much more is insured, as discussed previously). Until the WaMu failure, the idea had been that uninsured depositors would impose discipline on a reckless bank, knowing in advance that they could lose money in the event of a bankruptcy. The reason the FDIC and the other regulators decided to pay uninsured depositors was to avoid creating a bank run. When IndyMac had failed, the FDIC had not paid uninsured depositors in full. This created lines of depositors waiting to get their money, which were broadcast endlessly by the media. The regulators were concerned that a similar display might cause the general public to panic and demand their money out of healthy banks (remember the fractional reserve issue we discussed before). While the regulators had a legitimate concern, the manner in which they chose to handle WaMu was even more destructive.

Even though it was sold to Wells Fargo (with the shareholders getting a small amount) and the FDIC did not suffer a loss, its sale was mandated by the FDIC and the Fed. If the government forces the sale of a company, that company has failed (fairly or not). The interesting aspect of this situation is that the negative consequences for the bond market could have been avoided and the risk of retail bank runs controlled. The FDIC could have simply absorbed the extra losses paid to the uninsured depositors. The FDIC’s mission is to protect the safety and soundness of the banking system. If covering uninsured depositors is necessary, it can do so, but it should let the losses fall on the insurance fund, not on innocent bondholders. Violating the rule of law has consequences. The bursting of the real estate–market bubble turned into an international financial crisis for several reasons.

 

pages: 350 words: 109,220

In FED We Trust: Ben Bernanke's War on the Great Panic by David Wessel

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Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, Berlin Wall, Black Swan, central bank independence, credit crunch, Credit Default Swap, crony capitalism, debt deflation, Fall of the Berlin Wall, financial innovation, financial intermediation, full employment, George Akerlof, housing crisis, inflation targeting, London Interbank Offered Rate, Long Term Capital Management, market bubble, moral hazard, mortgage debt, new economy, Northern Rock, price stability, quantitative easing, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, savings glut, Socratic dialogue, too big to fail

Trust companies weren’t full-fledged members of the consortiums of banks — called “clearinghouses” — that agreed to stand behind one another at times of stress to stabilize the financial system. Instead, trust companies had to rely on clearinghouse banks to process checks written by their customers. Knickerbocker Trust Company, the Bear Stearns of its day, had lent heavily to the copper speculators. When word of that circulated, scores of depositors descended on its offices to withdraw money, the sort of bank run that was frighteningly frequent before government deposit insurance arrived. Never mind that just two weeks before, the state banking examiner had found the institution had funds sufficient to pay its depositors. On October 18, the National Bank of Commerce said it would no longer act as the intermediary between Knickerbocker and the clearinghouse, a move as devastating to Knickerbocker as JPMorgan Chase’s decision to stop “clearing” — or processing payments — for Lehman Brothers in September 2008, contributing to that venerable firm’s bankruptcy.

The institution was still in its adolescence when it confronted and failed its biggest test: misstep after misstep on the Fed’s part turned a bad late-1920s recession into the Great Depression, an indictment made by Nobel laureate Milton Friedman and collaborator Anna Schwartz, and later expanded by Ben Bernanke in his years as an academic. In the preface to a collection of his essays on the Depression, Bernanke described those years as “an incredibly dramatic episode — an era of stock market crashes, bread lines, bank runs, and wild currency speculation, with the storm clouds of war gathering ominously in the background all the while. Fascinating, and often tragic, characters abound during this period, from hapless policy makers trying to make sense of events for which their experience had not prepared them to ordinary people coping heroically with the effects of the economic catastrophe.” The words might have applied accurately to the early twenty-first century.

Officials had also expected the strength of exports and the banking system, which they regularly pronounced “well capitalized,” to keep the economy moving forward. The early days of August had dampened that optimism as well. “In August, it crossed into the banking system. That’s when things got really complicated,” said Donald Kohn, the Fed’s vice chairman, who had long taken comfort from what Greenspan once dubbed — in another automotive metaphor — the “spare tire” theory of finance. The spare tire theory holds that when the banks run into trouble, companies and consumers can borrow directly or indirectly in credit markets where money market funds, insurance companies, pension funds, and others lend cash. Likewise, when credit markets are tight, companies and consumers can borrow from banks. Problems in one sector are offset by the other, in short, and the economy keeps right on rolling. This theory had held up pretty well over the past two decades.

 

pages: 361 words: 97,787

The Curse of Cash by Kenneth S Rogoff

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Andrei Shleifer, Asian financial crisis, bank run, Ben Bernanke: helicopter money, Berlin Wall, bitcoin, blockchain, Bretton Woods, capital controls, Carmen Reinhart, cashless society, central bank independence, cryptocurrency, debt deflation, distributed ledger, Edward Snowden, ethereum blockchain, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial intermediation, financial repression, forward guidance, frictionless, full employment, George Akerlof, German hyperinflation, illegal immigration, inflation targeting, informal economy, interest rate swap, Isaac Newton, Johann Wolfgang von Goethe, Kenneth Rogoff, labor-force participation, large denomination, liquidity trap, money: store of value / unit of account / medium of exchange, moral hazard, moveable type in China, New Economic Geography, offshore financial centre, oil shock, open economy, payday loans, price stability, purchasing power parity, quantitative easing, RAND corporation, RFID, savings glut, secular stagnation, seigniorage, The Great Moderation, the payments system, transaction costs, unbanked and underbanked, unconventional monetary instruments, underbanked, unorthodox policies, Y2K, yield curve

In the extreme case, the government could adopt a version of the 1930s “Chicago plan,” which would essentially allow banks to issue money-like instruments only if they were 100% backed by government debt, which presumably can include central bank reserves.10 The name relates to Chicago economists Henry Simon, Frank Knight, Milton Friedman, and Irving Fisher (the last actually a Yale professor), who advocated the idea of “narrow banking” to mitigate moral hazard problems and eliminate bank runs (assuming that the government itself is fully solvent). A Chicago-type plan would mark a quantum change in the financial system and would radically reroute the way capital flows in the economy. By expanding the scope of the government’s monopoly on all retail transaction media, the government would be able to raise vast amounts of capital, essentially usurping one of the private banking system’s main funding mechanisms.

Another common practice, even more directly analogous to a Gesell tax, was to force people to hand in coins and then give them back a smaller number of coins similar in weight and content, for example, handing in four coins and getting back three.13 Many other ways can be used to implement a crude Gesell tax. At the improbable (but instructive) end of the spectrum is the idea of creating short-stick lotteries advanced by my Harvard colleague N. Gregory Mankiw, who attributes the idea to a graduate student. Mankiw proposed that the central bank run regular lotteries based on the serial numbers of currency in circulation. Notes with the losing numbers become completely worthless. The problem is that after a couple dozen lotteries, it would be pretty difficult to identify worthless notes without a tedious serial number cross-check against the official list. This inconvenience would, in turn, once again greatly diminish the liquidity of currency.

Regardless of author Frank Baum’s intentions, there is little doubt that deflation occurred at times under the gold standard, and the problem illustrates some of the drawbacks of any commodity-backed currency. Indeed, the idea that the gold standard produced spectacular stability is a fantasy and a false image of what the gold standard was really like. The gold standard era was punctuated by deep recessions (the recession of 1893 was in some ways almost as profound as the Great Depression of the 1930s). There were bank runs and long bouts of deflation. Nothing stopped governments from abandoning the gold standard when they desperately needed funding to pay for World War I. Once citizens realized that the gold standard might not go on forever, it proved extremely fragile. There is little reason to believe that a modern-day gold standard would fare any better. Efforts to design an alternative rule-based monetary system have proved elusive, although some progress has been made.

 

pages: 471 words: 97,152

Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by George A. Akerlof, Robert J. Shiller

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affirmative action, Andrei Shleifer, asset-backed security, bank run, banking crisis, collateralized debt obligation, conceptual framework, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, Deng Xiaoping, Donald Trump, Edward Glaeser, en.wikipedia.org, experimental subject, financial innovation, full employment, George Akerlof, housing crisis, Hyman Minsky, income per capita, inflation targeting, invisible hand, Isaac Newton, Jane Jacobs, Jean Tirole, job satisfaction, Joseph Schumpeter, Long Term Capital Management, loss aversion, market bubble, market clearing, mental accounting, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, new economy, New Urbanism, Plutocrats, plutocrats, price stability, profit maximization, purchasing power parity, random walk, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, South Sea Bubble, The Chicago School, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, working-age population, Y2K, Yom Kippur War

The wizard himself was the great deceiver, the U.S. president.14 These and other images stay with us as symbolic testimony to the importance of some of the elements of our theory of animal spirits. The Overheated Economy of the 1920s Leads to the Depression of the 1930s After the depression of the 1890s there was much discussion of what had happened, and eventually corrections were made that were supposed to prevent a recurrence. Notably the Federal Reserve System was created by an act of Congress in 1913 to prevent the kind of bank run that had started the depression. The act was hailed as a “fireproof credit structure”15 and a “safeguard against business depressions.” President Woodrow Wilson, upon signing the Federal Reserve Act on December 14, 1913, was almost euphoric about its ability to stabilize the economy, and he even called the act “the constitution of peace.”16 But in fact the new system did not function as well as had been hoped.

Confidence—and the economy itself—was not restored until World War II completely changed the dominant story of people’s lives, transforming the economy.39 Summing Up Depression History We have seen that the two most significant depressions in U.S. history were characterized by fundamental changes in confidence in the economy, in the willingness to press pursuit of profit to antisocial limits, in money illusion, and in changes in the perception of economic fairness. The depressions were intimately linked with these hard-to-measure variables. These two epochs may seem remote in history, and we may think that our economic institutions have improved enough to prevent such events from ever being repeated. Both depressions involved bank runs, and such runs now appear to be a thing of a past because of the establishment, in the 1930s, of comprehensive deposit insurance. The first of these depressions also preceded the founding of the U.S. central bank, the Federal Reserve System; and there has been considerable development in the theory of central banking since the second depression. On the other hand, the subprime crisis may be directly traced to a shortcoming of modern deposit insurance.

On the other hand, the subprime crisis may be directly traced to a shortcoming of modern deposit insurance. A shadow banking sector, unprotected by deposit insurance, grew up after the early 1990s in the United States, in the form of subprime lenders who supported their lending activities by issuing short-term commercial paper. Moreover, even the Federal Reserve System as it existed at the beginning of 2007 was apparently not up to the task of preventing behavior that looked very much like bank runs, as one financial institution after another failed. In response the Fed had to reinvent itself, with new lending facilities that went far beyond its original turf of depository institutions. The increasing complexity of our financial system makes it hard for economic institutions like deposit insurers or central banks to stay ahead of financial innovation. Central banks today are concerned about deflation, and they are unlikely to let it happen.

 

pages: 225 words: 11,355

Financial Market Meltdown: Everything You Need to Know to Understand and Survive the Global Credit Crisis by Kevin Mellyn

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asset-backed security, bank run, banking crisis, Bernie Madoff, bonus culture, Bretton Woods, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, disintermediation, diversification, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Francis Fukuyama: the end of history, global reserve currency, Home mortgage interest deduction, Isaac Newton, joint-stock company, liquidity trap, London Interbank Offered Rate, margin call, market clearing, moral hazard, mortgage tax deduction, Northern Rock, offshore financial centre, paradox of thrift, pattern recognition, pension reform, pets.com, Plutocrats, plutocrats, Ponzi scheme, profit maximization, pushing on a string, reserve currency, risk tolerance, risk-adjusted returns, road to serfdom, Ronald Reagan, shareholder value, Silicon Valley, South Sea Bubble, statistical model, The Great Moderation, the payments system, too big to fail, value at risk, very high income, War on Poverty, Y2K, yield curve

However, like any ‘‘privileged opportunity,’’ there are strings attached. One string is simply that banks need to make a profit. People prefer to put their money in a bank that isn’t losing money. In fact, banks that lose big sums of money, especially when it is unexpected, can be quickly brought down by a ‘‘run on the bank.’’ Depositors in these dramas rush to remove their money before the banks go bust, something that is sure to make it go bust. Bank runs brought down thousands of U.S. banks in the 1920s and 1930s, which is why the Federal Deposit Insurance Corporation (FDIC) was put in place to provide both oversight and deposit insurance to prevent them. But it’s not enough for banks to just avoid the rare disaster. Banks need to make enough money out of OPM to pay for the cost of running the payments system and other expenses. They also need to provide earnings growth and a dividend for the shareholders who give them capital.

In other words, the clearing house provided the first system of financial regulation. Voluntary self-regulation is not very popular these days. However, the simple fact is that no private clearing house has ever collapsed during a financial crisis. The history of formal regulation is less stellar. The United States has experienced two devastating structural financial crises and several lesser ones since the Federal Reserve was set up. The Northern Rock bank run in England (the first since 1866) happened after the U.K. abolished the old clearing house ‘‘club’’ and took up formal regulation. LONDON BECOMES MONEY MARKET TO THE WORLD The result of all these accidents of history was that England became the first national economy based on credit. Nothing really new in finance has been invented since. The building blocks have been simple to use once they actually existed.

If they can’t, banks could find themselves with a $1000 loan the borrower cannot possibly pay by selling stock. Borrowers walk away, leaving the bank with trash stocks. With their paper wealth wiped out, these same borrowers began defaulting on mortgages and other loans. Banks began to call in loans to raise cash, sending more customers into the tank. Soon, banks began to fail in large numbers, triggering more bank runs. Between the end of 1920 and FDR’s famous Bank Holiday of 1933, about 5,000 of America’s roughly 30,000 banks failed. Essentially, Ben Strong and the Federal Reserve Board let them fail, judging it irresponsible to bail out banks that made themselves insolvent. However, in banking, timing is everything. There is a very thin line between insolvency—being basically unable to pay your debts for lack of income or assets—and illiquidity—being unable to pay now because you can’t get the cash.

 

pages: 218 words: 63,471

How We Got Here: A Slightly Irreverent History of Technology and Markets by Andy Kessler

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Albert Einstein, Andy Kessler, automated trading system, bank run, Big bang: deregulation of the City of London, Bretton Woods, British Empire, buttonwood tree, Claude Shannon: information theory, Corn Laws, Edward Lloyd's coffeehouse, fiat currency, floating exchange rates, Fractional reserve banking, full employment, Grace Hopper, invention of the steam engine, invention of the telephone, invisible hand, Isaac Newton, Jacquard loom, Jacquard loom, James Hargreaves, James Watt: steam engine, John von Neumann, joint-stock company, joint-stock limited liability company, Joseph-Marie Jacquard, Maui Hawaii, Menlo Park, Metcalfe's law, packet switching, price mechanism, probability theory / Blaise Pascal / Pierre de Fermat, profit motive, railway mania, RAND corporation, Silicon Valley, Small Order Execution System, South Sea Bubble, spice trade, spinning jenny, Steve Jobs, supply-chain management, supply-chain management software, trade route, transatlantic slave trade, transatlantic slave trade, tulip mania, Turing machine, Turing test, William Shockley: the traitorous eight

Interest rates went up, another byproduct of too much money and inflation, which often caused banks to fail, and resulted in runs on those banks. The fractional reserve banking system was anything but stable, all because too much gold was in the British banking system. England had become Spain, laden with gold and not enough to spend it on. So England devised a way to get rid of gold. It turned out, at least in my opinion, to be the wrong way. *** Bank runs and financial crises from too much gold became common: They occurred in 1825, 1847, 1857 and 1866. Think about it. In periods of inflation, money loses its value relative to the goods it is buying. This lack of faith in money causes people to move into real assets, including gold. Even though money was exchanged into gold at a fixed rate, the fear that the rate would change when the money lost value, caused depositors to ask for real gold from banks.

And, in general, we may observe, that the dearness of every thing, from plenty of money, is a disadvantage, which attends an established commerce, and sets bounds to it in every country, by enabling the poorer states to undersell the richer in all foreign markets.” The best and brightest economists of the time met in Paris in 1867, to discuss a way to have both sound money and increased international trade. They came up with a system known as the “Price specie flow.” Sounds like a case of the runs, rather than a cure for bank runs. In 1870, even though England’s economic power had already peaked (but who knew?), the bankers and government officials agreed to this system - better known as the classical gold standard - since the economists were promising them a system that would naturally balance trade and keep governments from screwing up by issuing too much or too little money. There were four “rules of the game.” 1. 2. 3. 4.

But no, the U.S. was back on the gold standard and not allowed to increase the money supply, lest gold leave the country. Herbert Hoover vacuumed up whatever capital was left by increasing the top tax rate from 25 to 60 percent. In response, Franklin Roosevelt campaigned with "I pledge you, I pledge myself, to a new deal for the American people." In March 1933, just after FDR’s inauguration, unemployment hit 25 percent. After yet another bank run Roosevelt declared an 8-day banking holiday after which confidence in banks returned and deposits flowed back in. Later in 1933, the U.S. dropped the gold standard, following England, which dropped it in 1931. Unshackled, money supply could now increase and replenish banks. After a yearlong recession in 1938, New Deal spending kick-started the economy. A world war kept it going. MODERN GOLD 167 *** Meanwhile, the Germans were stuck paying WW I reparations.

 

pages: 280 words: 79,029

Smart Money: How High-Stakes Financial Innovation Is Reshaping Our WorldÑFor the Better by Andrew Palmer

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Affordable Care Act / Obamacare, algorithmic trading, Andrei Shleifer, asset-backed security, availability heuristic, bank run, banking crisis, Black-Scholes formula, bonus culture, Bretton Woods, call centre, Carmen Reinhart, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Graeber, diversification, diversified portfolio, Edmond Halley, Edward Glaeser, Eugene Fama: efficient market hypothesis, eurozone crisis, family office, financial deregulation, financial innovation, fixed income, Flash crash, Google Glasses, Gordon Gekko, high net worth, housing crisis, Hyman Minsky, implied volatility, income inequality, index fund, Innovator's Dilemma, interest rate swap, Kenneth Rogoff, Kickstarter, late fees, London Interbank Offered Rate, Long Term Capital Management, loss aversion, margin call, Mark Zuckerberg, McMansion, mortgage debt, mortgage tax deduction, Network effects, Northern Rock, obamacare, payday loans, peer-to-peer lending, Peter Thiel, principal–agent problem, profit maximization, quantitative trading / quantitative finance, railway mania, randomized controlled trial, Richard Feynman, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, short selling, Silicon Valley, Silicon Valley startup, Skype, South Sea Bubble, sovereign wealth fund, statistical model, transaction costs, Tunguska event, unbanked and underbanked, underbanked, Vanguard fund, web application

Creditors don’t have to lock their money up for years, borrowers can draw on their long-term future income, and banks can make money in the middle because the rate they pay to borrow money short is less than the rate they can charge to loan money long. Society benefits, too: long-term investments can be financed far more easily because they do not require creditors to sacrifice liquidity. The downside of maturity transformation is that a lot of creditors do sometimes want their money back at the same time. The most visible manifestation of this is the bank run, with people lining up outside branches to retrieve their cash. A bank run is the moment when the magic of maturity transformation is revealed as a cheap trick. The bank doesn’t have deposits on hand to meet demand, so the customers who turn up first are the ones who get their money back. Everyone has an interest in joining the run. The purpose of deposit insurance, which was introduced in the United States in the 1930s and is common to most but not all countries, is to prevent runs by reassuring people that they will never lose money below a certain threshold, even if the bank goes bust. *** BANKS SOLVE THE PROBLEM of liquidity by standing in between savers and borrowers, promising the former instant access to their money even as they loan it out for long periods to the latter.

The interbank markets, where banks loan money to each other, had suddenly seized up, as institutions realized that they could not be sure of the standing of their counterparties. Something unexpected was happening to the moneymaking machine. My very first week in the job coincided with a deposit run at Northern Rock, a British lender that came unstuck when it could no longer fund itself in the markets. Some of my earliest interviews on the beat were with people dusting off the manual on how to deal with bank runs. Organizing guide ropes inside bank branches was one tactic: better that than have people spill out onto the street, signaling to others that they should join the line. One HSBC veteran happily recounted stories of the financial crisis that gripped Asia in the late 1990s, when tellers were instructed to bring piles of cash into view to reassure people that banks were overflowing with money. Tales of improvisation from Asia were not supposed to be relevant to the West’s ultrasophisticated financial system.

The aim of these rules is twofold: first, to make sure that banks do not get into such terrible trouble again and, second, to ensure that when there is another crisis, the bill is not passed to the taxpayer. A lot of different weapons are being deployed in the service of these objectives, and despite the cries of those who say nothing has been done to hurt the banks, they are having a powerful effect. The two most important levers that regulators have to pull are liquidity and equity. Bank runs are not the only way that creditors can bring banks to their knees. Banks borrow short term in a lot of different markets and from a lot of different sources of capital. They borrow in repurchase, or “repo,” markets, pledging securities as collateral in return for cash; they borrow from money-market funds; they use commercial paper, a short-term capital-market instrument, to raise money; and so forth.

 

pages: 488 words: 144,145

Inflated: How Money and Debt Built the American Dream by R. Christopher Whalen

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Albert Einstein, bank run, banking crisis, Black Swan, Bretton Woods, British Empire, California gold rush, Carmen Reinhart, central bank independence, conceptual framework, corporate governance, cuban missile crisis, currency peg, debt deflation, falling living standards, fiat currency, financial deregulation, financial innovation, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, global reserve currency, housing crisis, interchangeable parts, invention of radio, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mutually assured destruction, non-tariff barriers, oil shock, payday loans, Plutocrats, plutocrats, price stability, pushing on a string, quantitative easing, rent-seeking, reserve currency, Ronald Reagan, special drawing rights, The Chicago School, The Great Moderation, too big to fail, trade liberalization, transcontinental railway, Upton Sinclair, women in the workforce

Indeed, my recent book, Crisis Economics: A Crash Course in the Future of Finance (The Penguin Press HC, 2010) shows that financial crises and economic crises driven by irrational exuberance of the financial system and the private sector—unrelated to public policies—existed for centuries before fiscal deviant sovereign and central banks distorted private-sector incentives. Markets do fail, and they do fail regularly in irrationally exuberant market economies; that is the source of the role of central banks and governments in preventing self-fulfilling and destructive bank runs and collapses of economic activity via Keynesian fiscal stimulus in response to collapse in private demand. The fact that these monetary policies and fiscal policies may eventually become misguided—creating moral hazard and creating large fiscal deficits and debt—does not deny the fact that private market failures—independent of misguided policies—triggered asset and credit bubbles that triggered a public rescue response.

It is interesting to speculate how the financial markets in the United States and Europe would have reacted had a silverite such as Stevenson become president. Rothbard described the scene facing Cleveland in that terrible year: Poor Grover Cleveland, a hard money Democrat, assumed the presidency in the middle of this monetary crisis. Two months later, the stock market collapsed, and a month afterward, in June 1893, distrust of the fraction reserve banks led to massive bank runs and failures throughout the country. Once again, however, many banks, national and state, especially in the West and South, were allowed to suspend specie payments. The panic of 1893 was on.13 Despite long speeches by Bryan and other pro-silver members of the House, on August 28, 1893, the lower chamber voted 239–108 to repeal the Sherman Act. This was a tremendous victory for Cleveland, but not the end of the battle over silver in Congress.

“It was this interpretation of the episode that provided the prime impetus for the monetary reform movement that culminated in the Federal Reserve Act.”19 The Crisis of 1907 One of the key events that drove the mounting public demand for monetary reform was the Crisis of 1907, an event that was a century in the making but was also the result of a growing economy that had far outgrown its financial system. Unlike previous panics, the troubles started in March, not during the autumn farm harvest season, and would last the entire year and beyond. The New York Stock Exchange went into a drastic decline, leading to public panic and depositor runs on banks. These bank runs, in turn, led to large-scale liquidations of “call loans,” short-term loans used to finance stock market purchases, causing further declines in stock prices and widespread insolvency for businesses and individuals. Because the reaction to crisis by banks and the entire financial system was to limit the availability of deposits when a liquidity run occurred, the flow of payments through the U.S. economy slowed, causing personal and commercial insolvencies to soar.

 

pages: 632 words: 159,454

War and Gold: A Five-Hundred-Year History of Empires, Adventures, and Debt by Kwasi Kwarteng

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accounting loophole / creative accounting, anti-communist, Asian financial crisis, asset-backed security, Atahualpa, balance sheet recession, bank run, banking crisis, Big bang: deregulation of the City of London, Bretton Woods, British Empire, California gold rush, capital controls, Carmen Reinhart, central bank independence, centre right, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, currency manipulation / currency intervention, Deng Xiaoping, discovery of the americas, Etonian, eurozone crisis, fiat currency, financial innovation, floating exchange rates, Francisco Pizarro, full employment, German hyperinflation, hiring and firing, income inequality, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, market bubble, money: store of value / unit of account / medium of exchange, moral hazard, new economy, oil shock, Plutocrats, plutocrats, Ponzi scheme, price mechanism, quantitative easing, rolodex, Ronald Reagan, South Sea Bubble, the market place, The Wealth of Nations by Adam Smith, too big to fail, War on Poverty, Yom Kippur War

The panic created more panic in a process Krugman said was similar to a microphone in an auditorium generating a ‘feedback loop’: ‘sounds picked up by the microphone are amplified by the loudspeakers’.22 These sounds are then amplified and increased until a deafening noise is created. The idea that a panic creates its own momentum is implicit in the phenomenon of a ‘bank run’, in which the prospect of a bank collapse actually causes this to happen, as depositors, doubtful of a bank’s solvency, remove their deposits, thereby damaging the bank. The feedback loop or bank run is essentially a circular process: it might be called a vicious circle. In the case of Thailand, the loss of investor confidence and the ensuing collapse in the value of the baht forced the central bank of Thailand to increase interest rates to defend the currency. Inevitably, both higher interest rates and a devalued currency created serious problems for Thai businesses and financial institutions.

Richards, the Deputy Governor of the Bank, remembered that ‘on Monday morning [12 December] the storm began, and till Saturday night it raged with an intensity that it is impossible for me to describe’.14 During that month, sixty county banks failed, more than half of them collapsing as a consequence of the failures of the London bank Pole & Co. and of Wentworth & Co., a leading Yorkshire bank. On 14 December, Pole & Co. stopped payment, which put forty of its correspondent county banks out of business.15 Pole & Co. had been put under pressure by an old-fashioned bank run, when depositors simply withdrew their money from the bank. The bank failures were only the last development of what had been a tumultuous year. The South American mining stocks also collapsed in dramatic fashion. One man caught up in the excitement of the stock market bubble was the young Benjamin Disraeli, a twenty-year-old Jewish adventurer, determined to make a name for himself in literature.

He believed that the future position of the City would be jeopardized if specie payments were suspended at the first sign of crisis.40 Already an informal adviser at the Treasury, he wished to retain gold payments for international transactions, but restrict them internally. The panic had seen banks, fearful for their own solvency, cashing in their banknotes for gold at the Bank of England and then, notoriously, refusing to supply their own customers with gold. This double standard aroused the ire of the young Cambridge economist. ‘Our system’, he wrote, ‘was endangered, not by the public running on the banks, but by the banks running on the Bank of England.’ As a result of this ‘internal run’, the central bank’s gold reserves had fallen from £17.5 million to £11 million in three days.41 The predicament of the banks, as described by Patrick Shaw Stewart, was acute. The ‘main difficulty in two words’, as this clever young banker saw it, was ‘to prop up those big houses who have debts owing from Germany which will never be paid, and, if they go under, to prevent the whole City coming down like a pack of cards’.42 The public, once the banks had suspended gold payments for customers, received paper money, notes issued by the British Treasury for everyday purposes, with denominations of £1 and 10 shillings (50p in modern terms).

 

pages: 248 words: 57,419

The New Depression: The Breakdown of the Paper Money Economy by Richard Duncan

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asset-backed security, bank run, banking crisis, banks create money, Ben Bernanke: helicopter money, Bretton Woods, currency manipulation / currency intervention, debt deflation, deindustrialization, diversification, diversified portfolio, fiat currency, financial innovation, Flash crash, Fractional reserve banking, income inequality, inflation targeting, Joseph Schumpeter, laissez-faire capitalism, liquidity trap, market bubble, market fundamentalism, Mexican peso crisis / tequila crisis, money: store of value / unit of account / medium of exchange, mortgage debt, private sector deleveraging, quantitative easing, reserve currency, Ronald Reagan, savings glut, special drawing rights, The Great Moderation, too big to fail, trade liberalization

Contents Preface Chapter 1: How Credit Slipped Its Leash Opening Pandora’s Box Constraints on the Fed and on Paper Money Creation Fractional Reserve Banking Run Amok Fractional Reserve Banking Commercial Banks The Broader Credit Market: Too Many Lenders, Not Enough Reserves Credit without Reserves The Flow of Funds The Rest of the World Notes Chapter 2: The Global Money Glut The Financial Account How It Works What Percentage of Total Foreign Exchange Reserves Are Dollars? What to Do with So Many Dollars? What about the Remaining $2.8 Trillion? Debunking the Global Savings Glut Theory Will China Dump Its Dollars? Notes Chapter 3: Creditopia Who Borrowed the Money? Impact on the Economy Net Worth Profits Tax Revenue Different, Not Just More Impact on Capital Conclusion Note Chapter 4: The Quantity Theory of Credit The Quantity Theory of Money The Rise and Fall of Monetarism The Quantity Theory of Credit Credit and Inflation Conclusion Notes Chapter 5: The Policy Response: Perpetuating the Boom The Credit Cycle How Have They Done so Far?

EXHIBIT 1.3 Currency Outside Banks Source: Federal Reserve, Flow of Funds Although this new paper money was no longer backed by gold (or by anything at all), it still served as the foundation upon which new credit could be created by the banking system. Fifty trillion dollars worth of credit could not have been erected on the 1968 base of 44 billion gold-backed dollars. Fractional Reserve Banking Run Amok The other constraint on credit creation at the time the Federal Reserve was established was the requirement that banks hold reserves to ensure they would have sufficient liquidity to repay their customers’ deposits on demand. The Federal Reserve Act specified that banks must hold such reserves either in their own vaults or else as deposits at the Federal Reserve. The global economic crisis came about because, over time, regulators lowered the amount of reserves the financial system was required to hold until they were so small that they provided next to no constraint on the amount of credit the system could create.

In order to understand how reserve requirements limited credit creation, it is first necessary to understand how credit is created through Fractional Reserve Banking. Fractional Reserve Banking Most banks around the world accept deposits, set aside a part of those deposits as reserves, and lend out the rest. Banks hold reserves to ensure they have sufficient funds available to repay their customers’ deposits upon demand. To fail to do so could result in a bank run and possibly the failure of the bank. In some countries, banks are legally bound to hold such reserves, while in others they are not. A banking system in which banks do not maintain 100 percent reserves for their deposits is known as a system of fractional reserve banking. In such a system, by lending a multiple of the reserves they keep on hand, banks are said to create deposits. The following example illustrates how the process of deposit creation occurs.

 

pages: 593 words: 189,857

Stress Test: Reflections on Financial Crises by Timothy F. Geithner

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Affordable Care Act / Obamacare, asset-backed security, Atul Gawande, bank run, banking crisis, Basel III, Bernie Madoff, Bernie Sanders, Buckminster Fuller, Carmen Reinhart, central bank independence, collateralized debt obligation, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, David Brooks, Doomsday Book, eurozone crisis, financial innovation, Flash crash, Goldman Sachs: Vampire Squid, housing crisis, Hyman Minsky, illegal immigration, implied volatility, London Interbank Offered Rate, Long Term Capital Management, margin call, market fundamentalism, Martin Wolf, McMansion, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, Nate Silver, Northern Rock, obamacare, paradox of thrift, pets.com, price stability, profit maximization, pushing on a string, quantitative easing, race to the bottom, RAND corporation, regulatory arbitrage, reserve currency, Saturday Night Live, savings glut, short selling, sovereign wealth fund, The Great Moderation, The Signal and the Noise by Nate Silver, Tobin tax, too big to fail, working poor

But when people lost confidence in a bank—sometimes because of rational concerns about its lending or leadership, sometimes not—they would all want their money back at the same time. The result was a run on the bank, like the famous scene in It’s a Wonderful Life when depositors rush to pull their money out of a Depression-era savings and loan. Confidence is a fragile thing. When it evaporates, it usually evaporates quickly. And it’s hard to get back once it’s lost. A financial crisis is a bank run writ large, a run on an entire financial system. People lose confidence that their money is safe—whether they’re stockholders or bondholders, institutional investors or elderly widows—so they rush to pull it out of the system, which makes the money remaining in the system even less safe, which makes everyone even less confident. This has happened a lot throughout history, in rich countries and poor ones, in sophisticated systems and simple ones.

The government can stand behind faltering firms, removing the incentives that turn fear into panic. Banks under siege used to stack money in their windows to reassure depositors there was no need to run; when governments put enough “money in the window,” they can reduce the danger they’ll have to use it. The classic example is deposit insurance, Franklin Delano Roosevelt’s response to Depression-era bank runs. Since 1934, the government has guaranteed deposits at banks, so insured depositors who get worried that their bank has problems no longer have an incentive to yank out their money and make the problems worse. Of course, the banking system that FDR inherited didn’t have “collateralized debt obligations,” “asset-backed commercial paper,” or other complexities of twenty-first-century finance. In the panic of 2008, insured bank deposits didn’t run on any significant scale, but all kinds of other frightened money did—and in the digital age, a run doesn’t require any physical running, just a phone call or a click of a mouse.

This is especially dangerous when their borrowing is in the form of short-term debt that can run when the mania ends. The classic example is a bank that borrows short from its depositors, who can demand their money back at any time, and lends long to businesses and homeowners. This kind of “maturity mismatch”—the use of short-term funding to finance long-term investments—is how George Bailey got into trouble in It’s a Wonderful Life, and it’s why we now have deposit insurance to avoid bank runs. But a lot of short-term loans to financial institutions can look a lot like uninsured bank deposits, and they can run when confidence goes. When creditors call in the loans and the institutions can’t recover the money they had lent to finance longer-term investments, they can fail in a hurry. This is unfortunate if it happens to a single bank, but devastating if it happens to the banking system as a whole.

 

pages: 497 words: 150,205

European Spring: Why Our Economies and Politics Are in a Mess - and How to Put Them Right by Philippe Legrain

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3D printing, Airbnb, Asian financial crisis, bank run, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, BRICs, British Empire, business process, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, cleantech, collaborative consumption, collapse of Lehman Brothers, collective bargaining, corporate governance, credit crunch, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency peg, debt deflation, Diane Coyle, Downton Abbey, Edward Glaeser, Elon Musk, en.wikipedia.org, energy transition, eurozone crisis, fear of failure, financial deregulation, first-past-the-post, forward guidance, full employment, Gini coefficient, global supply chain, Growth in a Time of Debt, hiring and firing, hydraulic fracturing, Hyman Minsky, Hyperloop, immigration reform, income inequality, interest rate derivative, Irish property bubble, James Dyson, Jane Jacobs, job satisfaction, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, liquidity trap, margin call, Martin Wolf, mittelstand, moral hazard, mortgage debt, mortgage tax deduction, North Sea oil, Northern Rock, offshore financial centre, oil shale / tar sands, oil shock, open economy, price stability, private sector deleveraging, pushing on a string, quantitative easing, Richard Florida, rising living standards, risk-adjusted returns, Robert Gordon, savings glut, school vouchers, self-driving car, sharing economy, Silicon Valley, Silicon Valley startup, Skype, smart grid, smart meter, software patent, sovereign wealth fund, Steve Jobs, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, Tyler Cowen: Great Stagnation, working-age population, Zipcar

But a bond-market panic is particularly pernicious because it can force even a solvent government to default, because it may not be able to raise funds quickly enough to meet its obligations. In that respect, a bond-market panic is like a bank run, where a dash for cash by depositors (or a refusal of other lenders to refinance its debts) can force even a solvent bank that can’t raise funds fast enough to fail. Bank runs used to be common and crippling until the central bank began stepping in as a “lender of last resort”, providing solvent banks with liquidity (cash loans secured against their assets). This not only ensured that solvent banks wouldn’t be felled by a liquidity crisis; it also stopped most bank runs from happening altogether, since depositors knew that the central bank stood ready to lend if necessary. For the same reasons, the central bank also typically acts as a lender of last resort to the government.

The various interlocking strands of the crisis came to a head in June 2012. After inconclusive elections in May, Greece was due to hold a re-run on 17 June. Syriza, a far-left party that wanted to renegotiate the country’s EU-IMF programme while remaining in the euro, looked set to win, with eurozone policymakers threatening to force Greece out if it did. That prospect was accelerating the slow-motion bank run across southern Europe, threatening a full-on stampede. Such was the fragmentation of eurozone financial markets that a creditworthy hotel in South Tirol (Italy) had to pay three percentage points more for a bank loan than its equivalent in North Tirol (Austria) – if it could borrow at all. In effect, the single market had shattered. As well as a liquidity crisis, many banks faced a solvency crisis.

Muddling through will not solve these problems: the longer zombie banks and excessive debts are allowed to fester, the longer economies will be sickly. Some believe the panacea is for southern European countries to reintroduce their own currencies. These would promptly depreciate, forcing them to default: a 25-per-cent depreciation would swell their euro-denominated debt burden by a third in their new currency; redenominating it would constitute a default too. Reintroducing a currency in the midst of a crisis would also provoke chaos: bank runs, lost savings, mass bankruptcies. But in any case, is devaluation really the solution? It hasn’t worked for Britain. Another solution, suggested by George Soros as a fallback option, is for Germany (or all the creditor countries) to leave the euro.316 The beauty of his proposal is that since southern Europe would keep the euro, it would not be forced to default, but that as the euro depreciated against the new Deutsche Mark, its debt burden in D-Mark terms would fall, imposing losses on Germany.

 

pages: 471 words: 124,585

The Ascent of Money: A Financial History of the World by Niall Ferguson

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Admiral Zheng, Andrei Shleifer, Asian financial crisis, asset allocation, asset-backed security, Atahualpa, bank run, banking crisis, banks create money, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, BRICs, British Empire, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collateralized debt obligation, colonial exploitation, Corn Laws, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, deglobalization, diversification, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Glaeser, Edward Lloyd's coffeehouse, financial innovation, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, Francisco Pizarro, full employment, German hyperinflation, Hernando de Soto, high net worth, hindsight bias, Home mortgage interest deduction, Hyman Minsky, income inequality, interest rate swap, Isaac Newton, iterative process, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour mobility, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, means of production, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Naomi Klein, Nick Leeson, Northern Rock, pension reform, price anchoring, price stability, principal–agent problem, probability theory / Blaise Pascal / Pierre de Fermat, profit motive, quantitative hedge fund, RAND corporation, random walk, rent control, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, seigniorage, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spice trade, structural adjustment programs, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, too big to fail, transaction costs, value at risk, Washington Consensus, Yom Kippur War

One of the most experienced investors there went so far as to suggest to the organizers that they ‘dispense altogether with an outside speaker next year, and instead offer a screening of Mary Poppins’.6 Yet the mention of Mary Poppins stirred a childhood memory in me. Julie Andrews fans may recall that the plot of the evergreen musical revolves around a financial event which, when the film was made in the 1960s, already seemed quaint: a bank run - that is, a rush by depositors to withdraw their money - something not seen in London since 1866. The family that employs Mary Poppins is, not accidentally, named Banks. Mr Banks is indeed a banker, a senior employee of the Dawes, Tomes Mousley, Grubbs, Fidelity Fiduciary Bank. At his insistence, the Banks children are one day taken by their new nanny to visit his bank, where Mr Dawes Sr. recommends that Mr Banks’s son Michael deposit his pocket-money (tuppence).

Prior to the 1390s, it might legitimately be suggested, the Medici were more gangsters than bankers: a small-time clan, notable more for low violence than for high finance. Between 1343 and 1360 no fewer than five Medici were sentenced to death for capital crimes.31 Then came Giovanni di Bicci de’ Medici. It was his aim to make the Medici legitimate. And through hard work, sober living and careful calculation, he succeeded. In 1385 Giovanni became manager of the Roman branch of the bank run by his relation Vieri di Cambio de’ Medici, a moneylender in Florence. In Rome, Giovanni built up his reputation as a currency trader. The papacy was in many ways the ideal client, given the number of different currencies flowing in and out of the Vatican’s coffers. As we have seen, this was an age of multiple systems of coinage, some gold, some silver, some base metal, so that any long-distance trade or tax payment was complicated by the need to convert from one currency to another.

By the time money has been deposited at three different student banks, M0 is equal to $100 but M1 is equal to $271 ($100 + $90 + $81), neatly illustrating, albeit in a highly simplified way, how modern fractional reserve banking allows the creation of credit and hence of money. The professor then springs a surprise on the first student by asking for his $100 back. The student has to draw on his reserves and call in his loan to the second student, setting off a domino effect that causes M1 to contract as swiftly as it expanded. This illustrates the danger of a bank run. Since the first bank had only one depositor, his attempted withdrawal constituted a call ten times larger than its reserves. The survival of the first banker clearly depended on his being able to call in the loan he had made to his client, who in turn had to withdraw all of his deposit from the second bank, and so on. When making their loans, the bankers should have thought more carefully about how easily they could call back the money - essentially a question about the liquidity of the loan.

 

pages: 457 words: 128,838

The Age of Cryptocurrency: How Bitcoin and Digital Money Are Challenging the Global Economic Order by Paul Vigna, Michael J. Casey

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3D printing, Airbnb, altcoin, bank run, banking crisis, bitcoin, blockchain, Bretton Woods, California gold rush, capital controls, carbon footprint, clean water, collaborative economy, collapse of Lehman Brothers, Columbine, Credit Default Swap, cryptocurrency, David Graeber, disintermediation, Edward Snowden, Elon Musk, ethereum blockchain, fiat currency, financial innovation, Firefox, Flash crash, Fractional reserve banking, hacker house, Hernando de Soto, high net worth, informal economy, Internet of things, inventory management, Julian Assange, Kickstarter, Kuwabatake Sanjuro: assassination market, litecoin, Long Term Capital Management, Lyft, M-Pesa, Mark Zuckerberg, McMansion, means of production, Menlo Park, mobile money, money: store of value / unit of account / medium of exchange, Network effects, new economy, new new economy, Nixon shock, offshore financial centre, payday loans, peer-to-peer lending, pets.com, Ponzi scheme, prediction markets, price stability, profit motive, RAND corporation, regulatory arbitrage, rent-seeking, reserve currency, Robert Shiller, Robert Shiller, Satoshi Nakamoto, seigniorage, shareholder value, sharing economy, short selling, Silicon Valley, Silicon Valley startup, Skype, smart contracts, special drawing rights, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, supply-chain management, Ted Nelson, The Great Moderation, the market place, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, Turing complete, Tyler Cowen: Great Stagnation, Uber and Lyft, underbanked, WikiLeaks, Y Combinator, Y2K, Zimmermann PGP

The Chinese government might bar its banks from handling bitcoin-related transaction services or declare that only the yuan be used within the nation’s borders, but it can’t shut down bitcoin, which resides nowhere and everywhere. The same challenge faces any government. This was appealing to a marginal but not insignificant subculture of passionate, highly motivated activists who are skeptical of central-bank-run fiat money. More broadly, it was consistent with a trend toward decentralization and individual empowerment in the broader economy, a world in which people are renting out their sofas to paying guests, selling solar-generated power back to the grid, and drawing their news from decentralized forums such as Twitter. In this environment and faced with what Nakamoto had proposed, an increasing number of people came to trust that his system worked.

That larger neighbor had become the basket case of the European Union, which had just forced the government in Athens to impose a “haircut,” or mandated losses, on its investors. The EU did this to ensure that private-sector investors who’d made risky bets on Greece shouldered some of the burden of the bailout that German and other euro-zone taxpayers were bearing. Cyprus’s overleveraged banks were an unintended casualty of that and were now faced with the terrifying threat of a bank run by their large Russian depositors. The dramatic solution, one endorsed by Germany and its EU partners, who were equally reluctant to bail out Russian oligarchs, was that the government in Nicosia would freeze deposits and confiscate 10 percent of them to pay for a bank bailout. This unprecedented step sent shock waves around the world. “If they can do that there, they can do it anywhere,” yelled Mark McGowan, a London cabbie famous for his profanity-laced YouTube videos, where he rants about topical matters under the moniker chunkymark, all delivered from his cab.

Interacting on bitcoin forums with other bitcoiners via his MagicalTux username, Karpelès pulled off a stunt to prove Mt. Gox’s solvency. He told his online correspondents to keep their eyes on two particular bitcoin addresses via a live, online blockchain monitor and that he would transfer 424,242.424242* bitcoins between them. It was the cryptocurrency equivalent of the old “wall of money” that bank managers of years past would put behind their tellers to dissuade panicked depositors from engaging in a bank run. After he moved such a large amount of coins, the maneuver had its desired effect. Such a massive handover of bitcoins suggested Mt. Gox was more flush than everyone feared. Three years later the blockchain-embedded history of this exercise, in which Karpelès effectively identified those addresses as belonging to Mt. Gox wallets, provided the starting point from which a posse of bitcoiners would trace the blockchain to discover two hundred thousand coins that were still present in Mt.

 

pages: 566 words: 155,428

After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead by Alan S. Blinder

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Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, banks create money, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, conceptual framework, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, Detroit bankruptcy, diversification, double entry bookkeeping, eurozone crisis, facts on the ground, financial innovation, fixed income, friendly fire, full employment, hiring and firing, housing crisis, Hyman Minsky, illegal immigration, inflation targeting, interest rate swap, Isaac Newton, Kenneth Rogoff, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, market bubble, market clearing, market fundamentalism, McMansion, moral hazard, naked short selling, new economy, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, price mechanism, quantitative easing, Ralph Waldo Emerson, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, statistical model, the payments system, time value of money, too big to fail, working-age population, yield curve, Yogi Berra

The real wake-up call didn’t come until August 9, 2007, when BNP Paribas, a huge French bank, halted withdrawals on three of its subprime mortgage funds—citing as its reason that “the complete evaporation of liquidity in certain market segments of the US securitization market has made it impossible to value certain assets fairly.” Loose translation: Dear Customer, you can’t get access to the money you thought was yours, and we have no idea how much money that is. To people acquainted with American history, Paribas’ announcement brought to mind the periodic “suspensions of specie payments” in the nineteenth century—times when some prominent bank precipitated bank runs by refusing to exchange its notes for gold or silver. The big French bank had just refused to exchange its fund shares for cash. Whether you were French or American, the signal was clear: It was time to panic. And markets dutifully did so, all over the world. At some point, and in this case it didn’t take long, the interplay of falling asset values with high leverage starts calling into question the solvency of heavily exposed financial firms like Bear and Paribas.

Back in 1873, Walter Bagehot, the sage of central banking, had instructed central banks on what to do in a liquidity crisis. His triad was lend freely, against good collateral, but at a penalty rate. Why? Because the acute shortage of liquidity in a panic can push even solvent institutions over the edge. Customers come in demanding their money. If the banks don’t have enough cash on hand, word gets around, and bank runs start sprouting up everywhere. The disease is highly contagious. By serving as the lender of last resort, the central bank is supposed to stop all that from happening. And every central banker in the world knew Bagehot’s catechism. So that’s basically what most of them did in August 2007. In fact, one can argue that the ECB stuck with the Bagehot script until late 2011. The ECB refused to cut its interest rates until October 2008 (yes, that’s 2008, not 2007), and even then it gave ground grudgingly.

At its September 18 meeting, the FOMC qualified its view that “the tightening of credit conditions has the potential to . . . restrain economic growth” by adding that “some inflation risks remain.” It was a finely balanced assessment of risks—far too balanced, given the emerging realities. Just five days earlier, the Bank of England had intervened massively to save Northern Rock, a huge savings institution, from the first bank run in Britain since 1866.* Things were coming unglued in England. Our problems here were strikingly similar. Could we be far behind? While the Fed’s speed made the ECB look like the proverbial tortoise watching the hare, this particular hare wasn’t actually running that fast. After its 50-basis-point rate cut on September 18, 2007, the Fed waited another six weeks—until its next regularly scheduled meeting—to move again.

 

pages: 288 words: 16,556

Finance and the Good Society by Robert J. Shiller

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bank run, banking crisis, barriers to entry, Bernie Madoff, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, cognitive dissonance, collateralized debt obligation, collective bargaining, computer age, corporate governance, Daniel Kahneman / Amos Tversky, Deng Xiaoping, diversification, diversified portfolio, Donald Trump, Edward Glaeser, eurozone crisis, experimental economics, financial innovation, full employment, fundamental attribution error, George Akerlof, income inequality, invisible hand, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, land reform, loss aversion, Louis Bachelier, Mahatma Gandhi, Mark Zuckerberg, market bubble, market design, means of production, microcredit, moral hazard, mortgage debt, Occupy movement, passive investing, Ponzi scheme, prediction markets, profit maximization, quantitative easing, random walk, regulatory arbitrage, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, self-driving car, shareholder value, Sharpe ratio, short selling, Simon Kuznets, Skype, Steven Pinker, telemarketer, The Market for Lemons, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, Vanguard fund, young professional, Zipcar

So everyone can make deposits that are backed by illiquid investments yet have their individual deposits remain highly liquid. It seems almost a miracle. This system usually works as intended, though it is vulnerable to sudden panic or bank runs: if people begin to distrust the bank, too many of them may ask to withdraw their money at one time and they will exhaust the bank’s supply of liquid funds.1 Even then, and even if there is no deposit insurance, if the government allows the bank to suspend liquidity temporarily, then depositors will still in all likelihood eventually get paid most of what they were owed, as the bank converts some of its illiquid holdings into cash. Bank regulators in modern times attempt to further reduce the problem of bank runs by demanding that banks maintain an adequate amount of reserves (cash in the vault or deposits at other banks, to make good immediately on any sudden withdrawals by depositors) and of capital (the total cushion of assets, after subtracting liabilities, available to make good on promises to depositors), so that they will not put the government in the position of having to bail out the banks.

That is, among the individuals inducted into the army between 1982 and 2001, those who had higher IQ scores had higher Sharpe ratios for their 2000 portfolios, controlling for other factors, re ecting greater exposure to small-cap and value stocks and better diversification. Grinblatt et al. (2011). 10. Kat and Menexe (2003). 11. Kaplan and Schoar (2005). 12. Berk and Green (2004). 13. Bogle (2009): 47. 14. Levine (1997). 15. French (2008). 16. Goetzmann et al. (2002). 17. Dugan et al. (2002). 18. Dugan (2005). 19. Acharya et al. (2010). 20. Kaufman (2005): 313. 21. Bernasek (2010): 48. Chapter 3. Bankers 1. Diamond and Dybvig (1983) lay out the issue of bank runs as a problem of multiple equilibria in a model of banks as creators of liquidity, thereby providing both a clear rationale for the existence of banks and an understanding of their vulnerabilities. 2. http://fraser.stlouisfed.org/publications/bms/issue/61/download/130/section10.p Table 130. 3. There were some forms of capital requirements before 1982, but no national systematic and regular enforcement of them for banks until then.

“Observations Made in a Tour in Swisserland [sic] . ” Columbian Magazine 2(12):688–93. Della Vigna, Stefano, John A. List, and Ulrike Malmendier. 2011. “Testing for Altruism and Social Pressure.” Unpublished paper, Department of Economics, University of California at Berkeley. De Waal, Frans. 1990. Peacemaking among Primates. Cambridge, MA: Harvard University Press. Diamond, Douglas, and Philip Dybvig. 1983. “Bank Runs, Deposit Insurance, and Liquidity.” Journal of Political Economy 91(3):401–19. Dixit, Avinash K., and Robert S. Pindyck. 1994. Investment under Uncertainty. Princeton, NJ: Princeton University Press. Djilas, Milovan. 1982 [1957]. The New Class: An Analysis of the Communist System. New York: Harcourt Brace Jovanovich. Douglas, William O. 1940. Democracy and Finance. New Haven, CT: Yale University Press.

 

The White Man's Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good by William Easterly

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airport security, anti-communist, Asian financial crisis, bank run, banking crisis, Bretton Woods, British Empire, call centre, clean water, colonial exploitation, colonial rule, Edward Glaeser, European colonialism, failed state, farmers can use mobile phones to check market prices, George Akerlof, Hernando de Soto, income inequality, income per capita, Indoor air pollution, invisible hand, Kenneth Rogoff, laissez-faire capitalism, land reform, land tenure, microcredit, moral hazard, Naomi Klein, purchasing power parity, randomized controlled trial, Ronald Reagan, Scramble for Africa, structural adjustment programs, The Fortune at the Bottom of the Pyramid, the scientific method, The Wealth of Nations by Adam Smith, transaction costs, War on Poverty, Xiaogang Anhui farmers

In 1995, in return for support of the “pro-market reformer” Boris Yeltsin, for example, Russian tycoons snatched up the valuable firms at bargain-basement prices. At the auction of the prize oil company Yukos, the Yeltsin government excluded bids from foreign buyers, eliminating most deep-pocket competitors. The Yeltsin government also allowed the banks running the auction to bid on the properties they themselves were auctioning. So Mikhail Khodorkovsky could bid on the auction of Yukos, even though he owned the bank running the auction, Menatep. Russian privatization chief Alfred Kokh alleged that Khodorkovsky used the money of Yukos itself to bid for Yukos, perhaps by pledging future oil deliveries in return for loans. He managed to buy 77 percent of Yukos shares for $309 million in December 1995.8 This was a pretty good deal for a company that by 2003 reached a market valuation of $30 billion.9 Khodorkovsky joined the top ranks on Forbes ’s annual billionaires list.

The IMF loan is conditional upon the government’s getting its finances in order so it can pay the loan back quickly. The IMF’s approach is simple. A poor country runs out of money when its central bank runs out of dollars. The central bank needs an adequate supply of dollars for two reasons. First, so that residents of the poor country who want to buy foreign goods can change their domestic money (let’s call it pesos) into dollars. Second, so those poor-country residents, firms, or governments who owe money to foreigners can change their pesos into dollars with which to make debt repayments to their foreign creditors. What makes the central bank run out of dollars? The central bank not only holds the nation’s official supply of dollars (foreign exchange reserves), it also makes loans to the government and supplies the domestic currency for the nation’s economy.

 

pages: 444 words: 86,565

Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions by Joshua Rosenbaum, Joshua Pearl, Joseph R. Perella

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asset allocation, asset-backed security, bank run, barriers to entry, capital asset pricing model, collateralized debt obligation, corporate governance, credit crunch, discounted cash flows, diversification, fixed income, London Interbank Offered Rate, performance metric, shareholder value, sovereign wealth fund, technology bubble, time value of money, transaction costs, yield curve

Prepare Stapled Financing Package The investment bank running the auction process (or sometimes a “partner” bank) may prepare a “pre-packaged” financing structure in support of the target being sold. The staple, which is targeted toward sponsors, was a mainstay in auction processes during the LBO boom of the mid-2000s. Although prospective buyers are not required to use the staple, historically it has positioned the sell-side advisor to play a role in the deal’s financing. Often, however, buyers seek their own financing sources to match or “beat” the staple. Alternatively, certain buyers may choose to use less leverage than provided by the staple. EXHIBIT 6.7 General Data Room Index To avoid a potential conflict of interest, the investment bank running the M&A sell-side sets up a separate financing team distinct from the sell-side advisory team to run the staple process.

., from Bloomberg), or both historical and predicted betas, and then show a range of outputs. 109 For simplicity, we assumed that the market value of debt was equal to the book value. 110 Ibbotson estimates a size premium of 1.65% for companies in the Low-Cap Decile for market capitalization. 111 Depending on the long-term structural effects of the subprime mortgage crisis and ensuing credit crunch, including the ability to raise debt at historical levels, these long-established benchmarks may be revisited. 112 The “free cash flow” term (“levered free cash flow” or “cash available for debt repayment”) used in LBO analysis differs from the “unlevered free cash flow” term used in DCF analysis as it includes the effects of leverage. 113 The term “investment bank” is used broadly to refer to financial intermediaries that perform corporate finance and M&A advisory services, as well as capital markets underwriting activities. 114 These letters are typically highly negotiated among the sponsor, the banks providing the financing, and their respective legal counsels before they are executed. 115 To compensate the GP for management of the fund, LPs typically pay 1% to 2% per annum on committed funds as a management fee. In addition, once the LPs have received the return of every dollar of committed capital plus the required investment return threshold, the sponsor typically receives a 20% “carry” on every dollar of investment profit. 116 LPs generally hold the capital they invest in a given fund until it is called by the GP in connection with a specific investment. 117 The investment bank running an auction process (or sometimes a “partner” bank) may offer a pre-packaged financing structure, typically for prospective financial buyers, in support of the target being sold. This is commonly referred to as stapled financing (“staple”). See Chapter 6: M&A Sale Process for additional information. 118 Alternatively, the banks may be asked to commit to a financing structure already developed by the sponsor. 119 The financing commitment includes: a commitment letter for the bank debt and a bridge facility (to be provided by the lender in lieu of a bond financing if the capital markets are not available at the time the acquisition is consummated); an engagement letter, in which the sponsor engages the investment banks to underwrite the bonds on behalf of the issuer; and a fee letter, which sets forth the various fees to be paid to the investment banks in connection with the financing.

 

pages: 355 words: 92,571

Capitalism: Money, Morals and Markets by John Plender

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Andrei Shleifer, asset-backed security, bank run, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, bonus culture, Bretton Woods, business climate, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, computer age, Corn Laws, corporate governance, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, discovery of the americas, diversification, Eugene Fama: efficient market hypothesis, eurozone crisis, failed state, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, Fractional reserve banking, full employment, Gordon Gekko, greed is good, Hyman Minsky, income inequality, inflation targeting, invention of the wheel, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, labour market flexibility, London Interbank Offered Rate, London Whale, Long Term Capital Management, manufacturing employment, Mark Zuckerberg, market bubble, market fundamentalism, means of production, Menlo Park, moral hazard, moveable type in China, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, paradox of thrift, Plutocrats, plutocrats, price stability, principal–agent problem, profit motive, quantitative easing, railway mania, regulatory arbitrage, Richard Thaler, rising living standards, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, shareholder value, short selling, Silicon Valley, South Sea Bubble, spice trade, Steve Jobs, technology bubble, The Chicago School, The Great Moderation, the map is not the territory, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, too big to fail, tulip mania, Upton Sinclair, We are the 99%, Wolfgang Streeck

This leads to a curious position where both depositor and borrower are entitled to control over the same funds simultaneously. If depositors lose confidence in the bank and demand their money back all at once, the bank will be unable to meet its obligations. A run on deposits will follow. Such crises of confidence started in northern Italy in the late Middle Ages when this so-called fractional reserve banking became the norm. A vivid description of how bank runs arose comes from a contemporary Venetian account in the sixteenth century: The following year, 1584, I heard of the failure of the Pisani and Tiepolo bank for a very large sum of money. This was caused chiefly by the bankruptcy of one Andrea da l’Osta, a Tuscan, a Pisan, and a very rich merchant, who had lived in our city for many years. He had built up much credit by his many business transactions, but in truth it was based on his reputation alone and not upon his capital, for this market and the city of Venice are naturally very much inclined to love and trust in appearances.

The bank kept going for a few days, paying them off as best it could, but in the end the crowd of creditors increased and the bank collapsed and failed, to the detriment of numberless people and great damage to this market, which was without a bank for four years, so that business shrank to an unbelievable extent. The Republic felt the effects of this, and took very extensive measures, but to no avail.36 Today, bank runs usually take a different form. Big depositors such as companies, pension funds and other financial institutions simply decide not to renew lending lines or certificates of deposit, so an ailing bank finds that its sources of funds dry up. Notwithstanding that, the British bank Northern Rock actually experienced in 2007 an old-style run in which worried retail depositors queued up outside branches to withdraw their money.

Wilson) 1, 2 Alberti, Leon Battista 1 Alessandri, Piergiorgio 1 Allen, Maurice 1 Ambassadors, The (Henry James) 1 Americans for Tax Reform 1 Anatomy of Change-Alley (Daniel Defoe) 1 Angell, Norman 1 Anglosphere 1, 2 Arab Spring 1 Aramaic 1 arbitrage 1 Argentina 1 Aristotle 1, 2, 3, 4, 5, 6, 7, 8, 9 art 1 Asian Tiger economies 1 Atlas Shrugged (Ayn Rand) 1 Austen, Jane 1 Austrian school 1 aviation 1 Babbitt (Sinclair Lewis) 1 Bair, Sheila 1 Balloon Dog (Orange) (sculpture) 1 Balzac 1 Bank for International Settlements 1, 2, 3, 4, 5, 6 Bank of England 1, 2, 3, 4, 5 bank runs 1 bankers 1, 2 bankruptcy laws 1, 2 Banks, Joseph 1 Banksy 1 Barbon, Nicholas 1, 2, 3 Bardi family 1 Barings 1 Baruch, Bernard 1, 2 base metal, transmutation into gold 1 Basel regulatory regime 1, 2, 3 Baudelaire, Charles 1 Baum, Frank 1 behavioural finance 1 Belgium 1, 2 Bell, Alexander Graham 1 Benjamin, Walter 1 Bernanke, Ben 1, 2, 3 Bi Sheng 1 Bible 1 bimetallism 1 Bismarck, Otto von 1 Black Monday (1987) 1 black swans 1 Blake William 1, 2, 3 Bloch, Marcel 1 Bloomsbury group 1, 2 Boccaccio 1 bond market 1 bonus culture 1 Bootle, Roger 1 Boston Tea Party 1 Boswell, James 1 Boulton, Matthew 1 Bowra, Maurice 1 Brandeis, Louis 1 Bretton Woods conference 1 British Land (property company) 1 British Rail pension fund 1 Brookhart, Smith 1, 2 Brunner, Karl 1 Bryan, William Jennings 1 Bubble Act (Britain 1720) 1 bubbles 1, 2, 3 Buchanan, James 1 Buffett, Warren 1, 2, 3 Buiter, Willem 1 Burdett, Francis 1 van Buren, Martin 1 Burke, Edmund 1, 2 Burns, Robert 1 Bush, George W. 1, 2 Butler, Samuel 1 Candide (Voltaire) 1 Carlyle, Thomas 1, 2, 3 Carnegie, Andrew 1 Carville, James 1 cash nexus 1 Cash Nexus, The (Niall Ferguson) 1 Cassel, Ernest 1, 2 Catholic Church 1, 2, 3 Cecchetti, Stephen 1 Centre for the Study of Capital Market Dysfunctionality, (London School of Economics) 1 central bankers 1 Cervantes 1 Chamberlain, Joseph 1 Chancellor, Edward 1 Chapter 11 bankruptcy 1 Charles I of England 1, 2 Charles II of England 1 Chaucer 1 Cheney, Dick 1 Chernow, Ron 1 Chicago school 1, 2 Child & Co. 1 China 1, 2 American dependence on 1, 2 industrialisation 1, 2, 3 manufacturing 1 paper currency 1 Christianity 1, 2, 3, 4, 5 Churchill, Winston 1 Cicero 1, 2 Citizens United case 1 Cleveland, Grover 1 Clyde, Lord (British judge) 1 Cobden, Richard 1, 2, 3, 4 Coggan, Philip 1 Cohen, Steven 1 Colbert, Jean-Baptiste 1, 2 Cold War 1 Columbus, Christopher 1 commodity futures 1 Companies Act (Britain 1862) 1 Condition of the Working Class in England (Engels) 1 Confucianism 1, 2, 3 conquistadores 1 Constitution of Liberty, The (Friedrich Hayek) 1 Coolidge, Calvin 1, 2, 3 Cooper, Robert 1 copyright 1 Cort, Cornelis 1 Cosimo the Elder 1 crash of 1907 1 crash of 1929 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11 creative destruction 1, 2 credit crunch (2007) 1, 2, 3 cum privilegio 1 Cyprus 1, 2 Dale, Richard 1, 2 Dante 1 Darwin, Erasmus 1 Das Kapital (Karl Marx) 1 Dassault, Marcel 1 Daunton, Martin 1 Davenant, Charles 1, 2, 3 Davies, Howard 1 debt 1 debt slavery 1 Decameron (Boccaccio) 1 Defoe, Daniel 1, 2, 3, 4, 5, 6, 7, 8 Dell, Michael 1 Deng Xiaoping 1, 2 derivatives 1 Deserted Village, The (Oliver Goldsmith) 1, 2, 3 Devil Take the Hindmost (Edward Chancellor) 1 Dickens, Charles 1, 2, 3, 4, 5, 6, 7, 8, 9 portentously named companies 1 Die Juden und das Wirtschaftsleben (Werner Sombart) 1 A Discourse of Trade (Nicholas Barbon) 1 Ding Gang 1 direct taxes 1, 2 Discorsi (Machiavelli) 1 diversification 1 Dodd–Frank Act (US 2010) 1, 2, 3 ‘dog and frisbee’ speech 1 dot.com bubble 1, 2, 3, 4 Drayton, Harley 1 Dumas, Charles 1, 2 Dürer, Albrecht 1 Duret, Théodore 1, 2 Dutch East India Company 1 Duttweiler, Gottlieb 1 Dye, Tony 1 East of Eden (film version) 1 Economic Consequences of the Peace (Keynes) 1, 2 Edison, Thomas 1, 2 efficient market hypothesis 1 electricity 1 Eliot, T.

 

pages: 278 words: 93,540

The Full Catastrophe: Travels Among the New Greek Ruins by James Angelos

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bank run, Berlin Wall, centre right, death of newspapers, Fall of the Berlin Wall, ghettoisation, illegal immigration, income inequality, moral hazard, Plutocrats, plutocrats, urban planning

Global financial markets convulsed in fear of an impending win for Syriza, whose young, necktie-averse leader, a former communist youth activist, threatened to renege on Greece’s debt obligations. German politicians renewed public deliberations over whether it would be best to eject Greece from the eurozone. “Grexit” became a frequently used word. Greeks started removing cash from their bank accounts over fears that ATM machines would soon start spitting out worthless drachmas. The severe bank run that resulted and the deepening cycle of doubt did not create an environment conducive to economic recovery, which of course made Greece’s problems even worse. In the next election, New Democracy, which depicted itself as the safe choice for voters wishing to remain in the euro, eked out a narrow victory, and on account of a parliamentary seat bonus afforded to the party with the plurality of votes, was able to form a coalition government that included its former rival, PASOK.

This was particularly the case in Germany, where ruling politicians demanded Greece honor the existing bailout agreement and questioned how its government could renege on the deal and still ask for money or debt relief, which would come at a cost to German and other European taxpayers. Given the discordant impasse between the two sides, doubts over Greece’s future in the eurozone once again intensified. “Grexit” reemerged in the lexicon, and even as many Greeks heralded Syriza’s bold stance toward the Troika, concerned Greek depositors began transferring their euros out of the country, stoking fears of another crippling bank run. Meanwhile, the state’s income rapidly eroded as many Greek taxpayers, anticipating Syriza would ease their burden, simply stopped paying, leaving the new government, just weeks in office, struggling desperately to make its debt payments and avoid default. Running out of time and money, Syriza’s leaders—like their predecessors—were compelled to yield to the creditors. In exchange for limited concessions, Greece’s new government agreed to extend the bailout program for some months—and along with it, the reviled mnimonio—though the agreement contained enough ambiguity to allow Greek authorities to deny this was the case.

In one of the pictures, a young Mavrommatis in an embroidered dress and white shoes stood next to the restaurant entrance looking happily at the camera while her handsome, grinning father embraced her. The restaurant had been in the family for four generations, and despite Greece’s economic problems, business still seemed to be going okay. The instability of the previous few months—two parliamentary elections within a month, massive protests, a bank run over fears the country would exit the euro—were developments that tended to discourage foreign visitors, and Greece that year suffered the consequences with regard to tourism. Still, the island received a loyal mix of affluent Athenians and foreign returnees. When Ilias joined me at the table, he told me he didn’t know why the police wrote them up for what he said were eleven violations. The restaurant, he said, had only three tables at the time for which there were open orders, and receipts for those were on the way.

 

pages: 376 words: 109,092

Paper Promises by Philip Coggan

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accounting loophole / creative accounting, balance sheet recession, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Madoff, Black Swan, Bretton Woods, British Empire, call centre, capital controls, Carmen Reinhart, carried interest, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, delayed gratification, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, falling living standards, fear of failure, financial innovation, financial repression, fixed income, floating exchange rates, full employment, German hyperinflation, global reserve currency, hiring and firing, Hyman Minsky, income inequality, inflation targeting, Isaac Newton, joint-stock company, Kenneth Rogoff, labour market flexibility, Long Term Capital Management, manufacturing employment, market bubble, market clearing, Martin Wolf, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Nick Leeson, Northern Rock, oil shale / tar sands, paradox of thrift, peak oil, pension reform, Plutocrats, plutocrats, Ponzi scheme, price stability, principal–agent problem, purchasing power parity, quantitative easing, QWERTY keyboard, railway mania, regulatory arbitrage, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Wealth of Nations by Adam Smith, time value of money, too big to fail, trade route, tulip mania, value at risk, Washington Consensus, women in the workforce

Imagine, however, that you are a creditor or a merchant selling goods. Your debtor or customer offers to pay you back, not in pounds or dollars, but in Monopoly money. You might not regard this as payment at all. The fundamental worry of creditors is that governments can issue as much money as they like. Indeed, the concept is built into the rules of the Monopoly board game. The rules state that, ‘The Bank never goes broke. If the Bank runs out of money it may issue as much more as may be needed by merely writing on any ordinary paper.’ And in a sense, monopoly money is what we are all using. The monopolists in this case are governments, which permit the issue of notes and coins and give such currency their seal of approval in the form of seals, mottoes, or the queen’s head. The practice of putting an image of the sovereign on one side of the coin was a way of advertising his power, and the first coins were introduced by the kings of Lydia around 640 BC.

As well as being the guardians of monetary stability, central banks also acted as the lender of last resort for the domestic banking system. The nineteenth century had suffered a series of panics as individual banks had gone bust. It was a time of rudimentary accounting standards, lax financial regulation and no deposit insurance; all this gave too much scope to bank executives and too little comfort to bank depositors. At the slightest sign of trouble, there would be bank runs as depositors queued to get their money out. Such runs were quite rational. As seen in Chapter 2, banks lent out a lot more money than they had cash-in-hand; they relied on the fact that only a small number of depositors would want to withdraw cash at the same time. Their depositors had instant access to their money while the banks made loans which would only be repaid over time; in the jargon, they borrowed short and lent long.

Index AAA Status of US Adams, Douglas Adams, John Addison, Lord Adenauer, Konrad adjustable rate mortgages adulterating coins affluent society Afghanistan ageing populations agrarian revolution Ahamed, Liaquat AIG air miles Alaska Amazon.com Angell, Norman Anglo Irish Bank annuities Argentina Aristophanes Arkansas Asian crisis of 1997 – 8 asset prices assignats Athens Austen, Jane austerity Austria Austrian school Austro-Hungarian empire Aztecs B&Q baby boomers Babylon Bagehot, Walter bailouts balanced budget Baldwin II, King of Jerusalem Balfour, Arthur Bancor Bank for International Settlements bank notes Bank of England bank reserves bank runs bankruptcy codes Banque Generale Barclays Capital Baring, Peter Baring Brothers Barnes & Noble barter Basle Accords Bastiat, Frederic BCA Research BCCI bear markets Bear Stearns Beaverbrook, Lord Belgium Belloc, Hillaire Benn, Tony Benn, William Wedgwood Bernanke, Ben Bernholz, Peter bezant Big Bang Big Mac index bills of exchange bimetallism biofuels Bismarck, Otto von Black Death Black Monday black swan Blackstone Blair, Tony Blum, Léon BMW Bodencreditanstalt Bohemia Bolsheviks Bonnet, Georges Bootle, Roger Brady, Nicholas Brady bonds Brazil Bretton Woods system Brodsky, Paul Brooke, Rupert Brown, Gordon Bruning, Heinrich Brutus Bryan, William Jennings bubbles budget deficits budget surplus building societies Buiter, Willem Bundesbank Burns, Arthur Bush, George W.

 

pages: 226 words: 59,080

Economics Rules: The Rights and Wrongs of the Dismal Science by Dani Rodrik

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airline deregulation, Albert Einstein, bank run, barriers to entry, Bretton Woods, butterfly effect, capital controls, Carmen Reinhart, central bank independence, collective bargaining, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Edward Glaeser, Eugene Fama: efficient market hypothesis, Fellow of the Royal Society, financial deregulation, financial innovation, floating exchange rates, fudge factor, full employment, George Akerlof, Gini coefficient, Growth in a Time of Debt, income inequality, inflation targeting, informal economy, invisible hand, Jean Tirole, Joseph Schumpeter, Kenneth Rogoff, labor-force participation, liquidity trap, loss aversion, low skilled workers, market design, market fundamentalism, minimum wage unemployment, oil shock, open economy, price stability, prisoner's dilemma, profit maximization, quantitative easing, randomized controlled trial, rent control, rent-seeking, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, school vouchers, South Sea Bubble, spectrum auction, The Market for Lemons, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, trade liberalization, trade route, ultimatum game, University of East Anglia, unorthodox policies, Washington Consensus, white flight

They were the object of study in models of varying complexity, including models based on perfectly rational, forward-looking investors (so-called rational bubbles). The financial crisis of 2008 had all the features of a bank run, and that, too, was a staple of economics. Models of self-fulfilling panic—a coordination failure in which individually rational withdrawals of credit lines produce collective irrationality in the form of a systemic drying up of liquidity—were well known to every student of economics, as were the conditions that facilitate such panics. The need for deposit insurance (coupled with regulation) to prevent bank runs was featured in all finance textbooks. A key pattern in the run up to the crisis was excessive risk taking by managers of financial institutions. Their compensation depended on it, but their behavior was not consistent with the interests of the banks’ shareholders.

 

pages: 840 words: 202,245

Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present by Jeff Madrick

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accounting loophole / creative accounting, Asian financial crisis, bank run, Bretton Woods, capital controls, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, desegregation, disintermediation, diversified portfolio, Donald Trump, financial deregulation, fixed income, floating exchange rates, Frederick Winslow Taylor, full employment, George Akerlof, Hyman Minsky, income inequality, index fund, inflation targeting, inventory management, invisible hand, laissez-faire capitalism, locking in a profit, Long Term Capital Management, market bubble, minimum wage unemployment, Mont Pelerin Society, moral hazard, mortgage debt, new economy, North Sea oil, Northern Rock, oil shock, price stability, quantitative easing, Ralph Nader, rent control, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, Ronald Reagan: Tear down this wall, shareholder value, short selling, Silicon Valley, Simon Kuznets, technology bubble, Telecommunications Act of 1996, The Chicago School, The Great Moderation, too big to fail, union organizing, V2 rocket, value at risk, Vanguard fund, War on Poverty, Washington Consensus, Y2K, Yom Kippur War

Its investors, stunned they could lose money at all, immediately began to withdraw what could have amounted to $5 billion from the fund. If investors in other money market funds followed, the consequences were unimaginable. Money market funds would sell their commercial paper willy-nilly. No Wall Street firm might survive. By the end of the week, the Treasury decided to guarantee the funds in all money market funds and stemmed the tide—what could have been a true bank run every bit as frightening as the bank runs of the early 1930s. Geithner and Paulson tried to get the stronger banks to merge with weaker ones, in particular, Goldman with Citigroup and JPMorgan Chase with Morgan Stanley, but the deals did not work out. To shore up its capital, Goldman separately lined up a $5 billion investment for preferred stock and warrants (rights to buy common stock in the future) from Warren Buffett.

By then, banks were not only making business and consumer loans in excess, but also selling stocks and bonds, running investment management companies, and creating new and highly speculative investment vehicles for individuals—as well as promoting their own stock prices. Such a credit boom and bust alone may not have resulted in the Depression but it contributed substantially to its severity. Thousands of banks failed in the early 1930s as savers withdrew their funds, fearing that the banks had no assets with which to pay them—a classic bank run. By 1932, one fourth of all U.S. banks had failed, and state after state imposed a moratorium on banking. Franklin Roosevelt, on taking office as president in 1933, declared a bank holiday, closing the deposit and withdrawal windows around the country temporarily. Roosevelt resisted pleas to nationalize the banks, but he and his advisers established comprehensive new regulations. Under Roosevelt, the federal government created the Federal Deposit In-surance Corporation (FDIC) to insure savers’ deposits in case of bank failure, giving the government further oversight of member banks.

Its high-profile chairman, Charles Mitchell, was forced to resign in 1933 in the depths of the banking panic, but the bank survived. Under Glass-Steagall, National City, like other major banks, was required to divest itself of its brokerage and underwriting arms, and do business only as a commercial bank, accepting deposits and making conservative purchases of government securities or cautious loans to business. The prestigious J.P. Morgan bank, run by the most influential financier of the age, was also separated from its investment banking arm, which took the name Morgan Stanley. The investment banks and brokerage firms were now regulated by the newly created Securities and Exchange Commission, whose first chairman was Joseph P. Kennedy, an aggressive financier himself and the father of a future president. The principal demand of the SEC was disclosure of far more information by investment banks about the firms for which they raised money, and other investor protections.

 

Unhappy Union by The Economist, La Guardia, Anton, Peet, John

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bank run, banking crisis, Berlin Wall, Bretton Woods, capital controls, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, credit crunch, Credit Default Swap, debt deflation, Doha Development Round, eurozone crisis, Fall of the Berlin Wall, Flash crash, illegal immigration, labour market flexibility, labour mobility, market fundamentalism, moral hazard, Northern Rock, oil shock, open economy, pension reform, price stability, quantitative easing, special drawing rights, supply-chain management, The Great Moderation, too big to fail, transaction costs, éminence grise

The deal was sealed with another layer of the favourite Franco-German mix: Sarkozy secured a commitment to hold twice-yearly euro-zone-only summits with the option, in future, of having a separate president; Merkel obtained support for yet another revision of the treaty aimed vaguely at “strengthening economic convergence within the euro area, improving fiscal discipline and deepening economic union”. Yet within days the markets were struck by another bombshell: the Greek prime minister announced on October 31st that he would hold a referendum to approve the terms of the new rescue programme. Markets tumbled. The ECB worried that bank runs would start in Greece. After two years of crushing austerity, nobody could be expected to vote for more of it. Greek bond yields shot up, pulling everyone else along (see Figure 5.1). Italian bonds again pushed past the 6% mark. The euro zone was close to breaking. FIG 5.1 From crisis to crisis Ten-year bond yields, 2010–2012, % Source: Thomson Reuters Caned in Cannes The system of peer-pressure, shy at first and then ever more insistent as the crisis worsened, reached its logical and brutal climax at the G20 summit hosted by Sarkozy in Cannes on November 3rd–4th 2011.

Changing currency is different from leaving a fixed peg. Whether done by returning to national money, or by creating a Germanic northern euro and a Latin southern one, redenomination would mean that currencies, assets and liabilities would all be repriced abruptly. Some companies, in both creditor and debtor countries, would go bust. Some countries that devalued would be crushed by their euro-denominated debt and default. And there could be bank runs as depositors in southern countries rushed to move their savings to northern ones. The dislocation would be most acute for the deficit countries. If the euro has to be split, it would probably be least disruptive if Germany were to leave, either alone or with a group of northern neighbours, allowing the rest to devalue. But Germany would not avoid economic pain, and a euro without the EU’s largest economy would make little sense.

 

pages: 468 words: 145,998

On the Brink: Inside the Race to Stop the Collapse of the Global Financial System by Henry M. Paulson

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asset-backed security, bank run, banking crisis, Bretton Woods, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, Doha Development Round, fear of failure, financial innovation, housing crisis, income inequality, London Interbank Offered Rate, Long Term Capital Management, margin call, moral hazard, Northern Rock, price discovery process, price mechanism, regulatory arbitrage, Ronald Reagan, Saturday Night Live, short selling, sovereign wealth fund, technology bubble, too big to fail, trade liberalization, young professional

If Bear fell, all these counterparties would be scrambling to collect their loans and collateral. To meet demands for payment, first Bear and then other firms would be forced to sell whatever they could, in any market they could—driving prices down, causing more losses, and triggering more margin and collateral calls. The firms that had already started to pull their money from Bear were simply trying to get out first. That was how bank runs started these days. Investment banks understood that if any questions arose about their ability to pay, creditors would flee at wildfire speed. This is why a bank’s liquidity was so critical. At Goldman we had absolutely obsessed over our liquidity position. We didn’t define it just in the traditional sense as the amount of cash on hand plus unencumbered assets that could be sold quickly. We asked how much money, under the most adverse conditions, could disappear on any given day; if everyone who could legally request their money back did so, how short would we be and could we meet our obligations?

The broader markets fell sharply, too, with the Dow Jones Industrial Average off nearly 300 points. For the day, the dollar hit a then-record low of $1.56 against the euro, while gold soared to a new high of $1,009 an ounce. Despite the backing of JPMorgan and the Fed, doubts remained about Bear’s ability to survive. Its accounts continued to flee, draining its reserves further. We needed to get a deal done by Sunday night, before the Asian markets opened and the bank run went global. That afternoon during a meeting on our housing initiatives, I asked Neel Kashkari if he was going to be around during the weekend, because we might need help on Bear. Neel said: “I have to imagine I’d be more useful to you in New York than sitting next to you in D.C.” I agreed, but before he took off I said, “I am sending you to do something you are totally unqualified to do, but you’re all I’ve got.”

We turned to another key issue—guaranteeing all bank transactional accounts—and picked it up again that afternoon in a conference call with Ben Bernanke, Tim Geithner, Kevin Warsh, Joel Kaplan, and David Nason. This idea was being pushed by Larry Lindsey, a former economic adviser to the president and onetime Fed governor. To pay their bills, companies routinely kept sums of cash in their checking accounts that far exceeded the $100,000 FDIC insurance limit. That left them prone to pulling their money at the first sign of danger and, as with Wachovia, thereby fueling bank runs. We discussed the idea of unlimited guarantees to stabilize these accounts, but we worried that in the midst of a panic, foreign depositors would move their money to the U.S. to take advantage of this new protection, sparking retaliatory actions by other countries and weakening the global financial system. None of us liked Lindsey’s idea, and Tim, in particular, was concerned. He rightly noted that it could lead to all kinds of distortions.

 

pages: 444 words: 151,136

Endless Money: The Moral Hazards of Socialism by William Baker, Addison Wiggin

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Andy Kessler, asset allocation, backtesting, bank run, banking crisis, Berlin Wall, Bernie Madoff, Black Swan, Branko Milanovic, Bretton Woods, BRICs, business climate, capital asset pricing model, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crony capitalism, cuban missile crisis, currency manipulation / currency intervention, debt deflation, Elliott wave, en.wikipedia.org, Fall of the Berlin Wall, feminist movement, fiat currency, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, housing crisis, income inequality, index fund, inflation targeting, Joseph Schumpeter, laissez-faire capitalism, land reform, liquidity trap, Long Term Capital Management, McMansion, moral hazard, mortgage tax deduction, naked short selling, offshore financial centre, Ponzi scheme, price stability, pushing on a string, quantitative easing, RAND corporation, rent control, reserve currency, riskless arbitrage, Ronald Reagan, school vouchers, seigniorage, short selling, Silicon Valley, six sigma, statistical arbitrage, statistical model, Steve Jobs, The Great Moderation, the scientific method, time value of money, too big to fail, upwardly mobile, War on Poverty, Yogi Berra, young professional

That year saw a stock market rally and active government and Fed intervention, with President Hoover claiming credit for engineering a recovery with a hat tip to the central bank in a speech before the American Bankers Association in October. However, the monetary contraction picked up steam in each year through 1933, ultimately shrinking bank money to $32.2 billion from $46.6 billion four years earlier. Stock market panics, bank runs, and business depressions were much more in the memory of individuals in that era than today. Probably by late 1931 the progression of events began to imbed fear and severely altered behavior, because hopes of merely replaying the comparatively shorter crises since the early 19th century were dashed by the severity of the decline in stock prices through the end of that year, over 74 percent as measured by the Cowles Commission data.

What is even more remarkable about this hypothesis is that policy moderation might have been helpful during the depression in more than one way. An effort by central banks to slightly improve their central bank balance sheets through boosting gold backing by 10 to 30 percent 104 ENDLESS MONEY (i.e., Sweden going from 29% gold backing to 32%) probably brightened the internal investment climate. On one hand it might discourage currency and bank runs, but on the other hand it would not spook capital markets by monopolizing limited state resources through hoarding. Even more interesting is that some countries such as Denmark could take the approach of dialing down what may have been excessive reserves (40% in 1929) to a more manageable ratio (25% in 1934), and be rewarded for it. The tendency of economic researchers to think linearly is a dangerous oversimplification.

Bernanke also added in the possibility that the Fed could become involved in the foreign exchange market, noting that the 40 percent devaluation of the dollar against gold in 1933-34 enforced by Franklin Roosevelt had been effective in ending deflation. Prior to this, the government had outlawed private ownership of gold before resetting its price to $35, in effect taxing private savings and eliminating this refuge from bank runs. Like his statements about the alchemist, this is also nonsensical, because now there is no link to gold. A Penny In the Fuse Box In 2008 Federal Reserve governors more than doubled the central bank’s balance sheet, pumping roughly $1 trillion of credit into member banks and securities markets, and importantly other central banks globally. This action has one parallel historically, when Fed reserves mushroomed from $1.85 billion in February 1932 to $2.51 billion at the end of that year.

 

pages: 868 words: 147,152

How Asia Works by Joe Studwell

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affirmative action, anti-communist, Asian financial crisis, bank run, banking crisis, barriers to entry, borderless world, Bretton Woods, British Empire, call centre, capital controls, central bank independence, collective bargaining, crony capitalism, cross-subsidies, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, demographic dividend, Deng Xiaoping, failed state, financial deregulation, financial repression, Gini coefficient, glass ceiling, income inequality, income per capita, industrial robot, Joseph Schumpeter, land reform, land tenure, large denomination, market fragmentation, non-tariff barriers, offshore financial centre, oil shock, open economy, passive investing, purchasing power parity, rent control, rent-seeking, Ronald Coase, South China Sea, The Wealth of Nations by Adam Smith, urban sprawl, Washington Consensus, working-age population

Despite this, as in the contemporary United States, vast numbers of small private banks continued to operate – there were around 2,000 in Japan at the start of the twentieth century – and it was this that allowed for widespread capture of banks by business groups, which went into banking to obtain cheap and reliable supplies of funds for their activities. Captive banks ask fewer questions than independent ones and, when regulation is weak, can lend their owners a great deal of money compared with the investment needed to start or buy a bank. In the United States, havoc broke out among under-regulated small banks in 1907, in a crisis referred to as the Panic. In 1927 Japan faced an even greater number of bank runs and failures. Since the most hopelessly conflicted banks were small ones, the Japanese government passed a new Banking Act that forced banks to merge. However, this simply opened the way for a few huge zaibatsu lenders to dominate. The four biggest ones came to control the majority of credit, pursuing mostly intra-group lending while denying finance to downstream manufacturers outside their groups.

However, this only caused capital flight to accelerate, facilitated by the fact that most capital controls had been lifted in the early 1970s in line with IMF and World Bank advice. Printing money became the only form of finance left. Like Korea, the Philippines was used to an elevated inflation rate because of rediscounting, but price rises accelerated greatly in the mid 1980s. The inflation rate was 50 per cent in 1984 and the currency slid from 7.5 pesos to the dollar in 1980 to 20 in 1986. Following bank runs, bank nationalisations and the closure of large investment houses in 1981, another four banks had to be shut.55 In February 1986, amid large-scale protests, Marcos fled on a US government airplane, at the zenith of a crisis in which the Philippine economy shrank by a quarter.56 The meltdown signalled the end of the Philippines’ association with a particularly perverted form of developmental finance.

Om Liem was very smart and very conservative, but he could not insure against systemic failure. When the Asian crisis spread from Thailand to Indonesia, there was so much panic that BCA, Liem Sioe Liong, the Suhartos and all their monopolies went down with it. The rupiah’s value started to fall at the end of 1997 and it quickly became apparent that the banking system as a whole would be unable to meet its foreign obligations. Bank runs ensued without reference to the particular solvency of individual banks. An extraordinary IDR65 trillion (around USD8 billion)87 was withdrawn from BCA in two weeks as depositor queues snaked around its branches. Liem Sioe Liong was required to put up collateral assets to cover money the central bank lent BCA to pay out its depositors. He handed over assets he said were worth IDR53 trillion, but, when the businesses and land that comprised them were sold, only IDR20 trillion was raised.

 

pages: 584 words: 187,436

More Money Than God: Hedge Funds and the Making of a New Elite by Sebastian Mallaby

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Andrei Shleifer, Asian financial crisis, asset-backed security, automated trading system, bank run, barriers to entry, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, Bretton Woods, capital controls, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, currency peg, Elliott wave, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, fixed income, full employment, German hyperinflation, High speed trading, index fund, Kenneth Rogoff, Long Term Capital Management, margin call, market bubble, market clearing, market fundamentalism, merger arbitrage, moral hazard, natural language processing, Network effects, new economy, Nikolai Kondratiev, pattern recognition, pre–internet, quantitative hedge fund, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, risk-adjusted returns, risk/return, rolodex, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical arbitrage, statistical model, technology bubble, The Great Moderation, The Myth of the Rational Market, too big to fail, transaction costs

He proceeded on his way to the Post House restaurant, just off Madison Avenue, where he dined on steaks with Bernstein and his five Kynikos partners. If Chanos had resented Schwartz’s suggestion when he first heard it, his mood morphed into unrestrained outrage over the next day or so. At six-thirty on Friday morning, when Squawk Box was on the air, word began to spread that the Fed was brokering a rescue for Bear Stearns; the closing of its hedge funds’ margin accounts had been followed by a collapse of confidence and a classic bank run. Schwartz had known the previous evening that his bank was going down, and yet he had tried to inveigle Chanos onto television anyway. “That fucker was going to throw me under the bus,” Chanos recalled later.2 Chanos’s exchange with Schwartz captured the transformed relationship between banks and hedge funds. Back in 1994, Bear Stearns had sunk the wayward hedge fund Askin Capital, forcing it into default and seizing a good portion of its assets.

THE FAILURE OF LEHMAN BROTHERS SPELLED THE END of the modern investment-bank model. Lehman and its rivals had borrowed billions in the short-term money markets, then used the money to buy assets that were hard to sell in a hurry. When the crisis hit, short-term lending dried up instantly; everyone could see that the investment banks might face a crunch, and of course the fear was self-fulfilling. To stave off this sort of bank run, commercial banks have government insurance to reassure depositors and access to emergency lending from the Federal Reserve. But investment banks have no such safety net. Believing that they were somehow invincible, they had behaved as though they did have one. The next domino to fall was Merrill Lynch, the investment bank famous for its “thundering herd” of nearly seventeen thousand stockbrokers.

One of Wall Street’s oldest names was collapsing into the arms of a Main Street commercial bank. As one newspaper wrote, it was as if Wal-Mart were buying Tiffany’s. Now that Bear, Lehman, and Merrill were gone, the two remaining investment banks, Morgan Stanley and Goldman Sachs, came under pressure. All of Wall Street knew that their reliance on short-term funding, coupled with extremely high leverage, made them vulnerable to a bank run; and the Morgan and Goldman stock prices began to show up permanently at the top of the CNBC screen, in what traders called the “death watch.”25 The trouble at the giant insurer AIG only made things worse. By writing credit default swaps, AIG had sold protection against the danger that all manner of bonds might go into default—it was the kind of crazy risk taking you got when you located an ambitious trading operation inside the bosom of a well-capitalized firm, imbuing the traders with a heady sense of invulnerability.

 

pages: 700 words: 201,953

The Social Life of Money by Nigel Dodd

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accounting loophole / creative accounting, bank run, banking crisis, banks create money, Bernie Madoff, bitcoin, blockchain, borderless world, Bretton Woods, BRICs, capital controls, cashless society, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, computer age, conceptual framework, credit crunch, cross-subsidies, David Graeber, debt deflation, dematerialisation, disintermediation, eurozone crisis, fiat currency, financial innovation, Financial Instability Hypothesis, financial repression, floating exchange rates, Fractional reserve banking, German hyperinflation, Goldman Sachs: Vampire Squid, Hyman Minsky, illegal immigration, informal economy, interest rate swap, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, Kula ring, laissez-faire capitalism, land reform, late capitalism, liquidity trap, litecoin, London Interbank Offered Rate, M-Pesa, Marshall McLuhan, means of production, mental accounting, microcredit, mobile money, money: store of value / unit of account / medium of exchange, mortgage debt, new economy, Nixon shock, Occupy movement, offshore financial centre, paradox of thrift, payday loans, Peace of Westphalia, peer-to-peer lending, Ponzi scheme, post scarcity, postnationalism / post nation state, predatory finance, price mechanism, price stability, quantitative easing, quantitative trading / quantitative finance, remote working, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Satoshi Nakamoto, Scientific racism, seigniorage, Skype, Slavoj Žižek, South Sea Bubble, sovereign wealth fund, special drawing rights, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, Wave and Pay, WikiLeaks, Wolfgang Streeck, yield curve, zero-coupon bond

They are exchangeable with non-Cypriot euros at a rate of one to one only up to a limit. They are, in this sense, the special purpose money of the Eurozone. Similar issues have arisen elsewhere in Euroland during this crisis. In Greece, a “slow motion bank run” has been underway since the country’s sovereign debt crisis blew up in late 2011. Here, the onus is on moving funds out of the Greek banking system and into safe haven elsewhere in the Eurozone. At its height, Greek banks were reporting €30 million of outflow of funds into other Eurozone member states. This was not a conventional bank run, fueled by fear of bank failure, but a run caused by prevailing concerns about exchange rate risk, and more specifically, about the prospect of an instantaneous devaluation of Greek deposits should the country exit the Eurozone altogether.47 Here too, then, not all euros were equal: not because they could not move but because of an overwhelming sense that they had to.

While wealthier Greeks were investing heavily in London real estate, others were hoarding cash in more mundane domestic spaces because of what might happen to their bank accounts should Greece leave the Eurozone and launch its own independent currency. Fearful that their savings would be decimated overnight, Greeks were reversing the conventional wisdom that a bank is the most secure place to keep your money. What began as a crisis in the U.S. subprime mortgage market in 2007 was now manifesting itself as a slow-motion bank run. This problem was not confined to Greece but was happening throughout the Eurozone amid widespread doubt about the future of a project that had been launched with such optimism a little more than a decade before. Since the collapse of Lehman Brothers in September 2008, the world’s major central banks have been plowing vast quantities of money into the banking system. The U.S. Federal Reserve has made commitments totaling some $29 trillion, lending $7 trillion to banks during the course of one single fraught week.

Should a eurozone member ultimately find itself unable to consolidate its budgets or restore its competitiveness, this country should, as a last resort, exit the monetary union while being able to remain a member of the EU” (Schäuble 2010). 46 After initially proposing a levy or tax on all deposit accounts—9.9 percent for those too big to be covered by the EU-mandated €100,000 deposit guarantee, and 6.75 percent for the smaller depositors—the government reached a compromise whereby only larger depositors would be hit. 47 See Gavyn Davies, “The Anatomy of the Eurozone Bank Run,” Financial Times, May 20, 2012. 48 Following Schmitt, Agamben defines sovereignty in terms of the capacity to suspend the rule of law. He describes the declaration of a state of exception: the ban. It is an idea that “calls into question every theory of the contractual origin of state power and, along with it, every attempt to ground political communities in something like a ‘belonging,’ whether it be founded on popular, national, religious, or other identity” (Agamben 1998: 181). 49 As Agamben describes it, the camp is a piece of land that is “placed outside the normal juridical order, but is nevertheless not simply an external space” (Agamben 2000: 133).

 

pages: 358 words: 106,729

Fault Lines: How Hidden Fractures Still Threaten the World Economy by Raghuram Rajan

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accounting loophole / creative accounting, Andrei Shleifer, Asian financial crisis, asset-backed security, bank run, barriers to entry, Bernie Madoff, Bretton Woods, business climate, Clayton Christensen, clean water, collapse of Lehman Brothers, collateralized debt obligation, colonial rule, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, diversification, Edward Glaeser, financial innovation, floating exchange rates, full employment, global supply chain, Goldman Sachs: Vampire Squid, illegal immigration, implied volatility, income inequality, index fund, interest rate swap, Joseph Schumpeter, Kenneth Rogoff, knowledge worker, labor-force participation, Long Term Capital Management, market bubble, Martin Wolf, medical malpractice, microcredit, moral hazard, new economy, Northern Rock, offshore financial centre, open economy, price stability, profit motive, Real Time Gross Settlement, Richard Florida, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, school vouchers, short selling, sovereign wealth fund, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, upwardly mobile, Vanguard fund, women in the workforce, World Values Survey

However, an intriguing study suggests that bank CEOs in some of the worst-hit banks did not lack for incentives to manage their banks well.8 Richard Fuld at Lehman owned about $1 billion worth of Lehman stock at the end of fiscal year 2006, and James Cayne of Bear Stearns owned $953 million. These CEOs lost tremendous amounts when their firms were brought down by what were effectively modern-day bank runs. Indeed, the study shows that banks in which CEOs owned the most stock typically performed the worst during the crisis. These CEOs had substantial amounts to lose if their bets did not play out well (no matter how rich they otherwise were). Unlike those of some of their traders, their bets were not one-way. One explanation is the CEOs were out of touch. An unflattering portrayal of Fuld has him holed up in his office on the 31st floor of Lehman’s headquarters with little knowledge of what was going on in the rest of the building.9 Indeed, in a tongue-in-cheek op-ed piece in the New York Times, Calvin Trillin argued that Wall Street’s problem was that it had undergone a revolutionary change in the quality of personnel over generations.10 In Trillin’s time in college, only those in the bottom third of their university class used to go on to Wall Street careers, which were boring and only moderately remunerative.

I asked earlier whether the activities of insured banks should be restricted. Perhaps a better question is whether banks should have deposit insurance at all. This may be a strange question to ask at a time when governments all over the world have guaranteed all the debt issued by their banks, not just the small, already insured deposits. But that is precisely the reason for my question. Deposit insurance is not meant to quell panics by preventing bank runs: the government, as we have recently seen, takes care of that. Instead, it merely protects individual banks from market discipline. Put differently, with implicit government guarantees all over the place, should we not strive to remove explicit government guarantees where we can? One reason for insuring deposits was to provide a safe means of savings to households where none existed. Today, this rationale is archaic—a money-market fund invested in Treasury bills can provide that safety.

 

pages: 385 words: 111,807

A Pelican Introduction Economics: A User's Guide by Ha-Joon Chang

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Affordable Care Act / Obamacare, Albert Einstein, Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, Berlin Wall, bilateral investment treaty, borderless world, Bretton Woods, British Empire, call centre, capital controls, central bank independence, collateralized debt obligation, colonial rule, Corn Laws, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, discovery of the americas, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Francis Fukuyama: the end of history, Frederick Winslow Taylor, full employment, George Akerlof, Gini coefficient, global value chain, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, Haber-Bosch Process, happiness index / gross national happiness, high net worth, income inequality, income per capita, interchangeable parts, interest rate swap, inventory management, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, knowledge economy, laissez-faire capitalism, land reform, manufacturing employment, Mark Zuckerberg, market clearing, market fundamentalism, Martin Wolf, means of production, Mexican peso crisis / tequila crisis, Northern Rock, obamacare, offshore financial centre, oil shock, open borders, post-industrial society, precariat, principal–agent problem, profit maximization, profit motive, purchasing power parity, quantitative easing, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, Scramble for Africa, shareholder value, Silicon Valley, Simon Kuznets, sovereign wealth fund, spinning jenny, structural adjustment programs, The Great Moderation, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade liberalization, transaction costs, transfer pricing, trickle-down economics, Washington Consensus, working-age population, World Values Survey

She knows that her bank actually does not have the cash to pay all her fellow depositors, should a sufficient number of them want to withdraw their deposits in cash at the same time. Even though the belief may be totally unfounded – as was the case with the Fidelity Fiduciary Bank – it will become a ‘self-fulfilling prophecy’ if enough account holders think and act in this way. This situation is known as a bank run. We have seen examples of it in the wake of the 2008 global financial crisis. Customers queued up in front of Northern Rock bank branches in the UK, while online depositors in the UK and the Netherlands clogged up the website of Icesave, the internet arm of the collapsing Icelandic bank Landsbanki. Banking is a confidence trick (of a sort), but a socially useful one (if managed well) So, is banking a confidence trick?

Under this insurance scheme, the government commits itself to compensate all depositors up to a certain amount (for example, €100,000 in the Eurozone countries at the moment), if their banks are unable to pay their money back. With this guarantee, savers do not have to panic and withdraw their deposits at the slightest fall in confidence in their banks. This significantly reduces the chance of a bank run. Another way to manage confidence in the banking system is to restrict the ability of the banks to take risk. This is known as prudential regulation. One important measure of prudential regulation is the ‘capital adequacy ratio’. This limits the amount that a bank can lend (and thus the liabilities it can create in the form of deposits) to a certain multiple of its equity capital (that is, the money provided by the bank’s owners, or shareholders).

 

pages: 378 words: 110,518

Postcapitalism: A Guide to Our Future by Paul Mason

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Alfred Russel Wallace, bank run, banking crisis, banks create money, Basel III, Bernie Madoff, Bill Gates: Altair 8800, bitcoin, Branko Milanovic, Bretton Woods, BRICs, British Empire, business process, butterfly effect, call centre, capital controls, Claude Shannon: information theory, collaborative economy, collective bargaining, Corn Laws, corporate social responsibility, credit crunch, currency manipulation / currency intervention, currency peg, David Graeber, deglobalization, deindustrialization, deskilling, discovery of the americas, Downton Abbey, en.wikipedia.org, energy security, eurozone crisis, factory automation, financial repression, Firefox, Fractional reserve banking, Frederick Winslow Taylor, full employment, future of work, game design, income inequality, inflation targeting, informal economy, Internet of things, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kevin Kelly, knowledge economy, knowledge worker, late capitalism, low skilled workers, market clearing, means of production, Metcalfe's law, money: store of value / unit of account / medium of exchange, mortgage debt, Network effects, new economy, Norbert Wiener, Occupy movement, oil shale / tar sands, oil shock, payday loans, post-industrial society, precariat, price mechanism, profit motive, quantitative easing, race to the bottom, RAND corporation, rent-seeking, reserve currency, RFID, Richard Stallman, Robert Gordon, secular stagnation, sharing economy, Stewart Brand, structural adjustment programs, supply-chain management, the scientific method, The Wealth of Nations by Adam Smith, Transnistria, union organizing, universal basic income, urban decay, urban planning, wages for housework, women in the workforce

Today there is no Geneva Convention when it comes to the fight between elites and the people they govern: the robo-cop has become the first line of defence against peaceful protest. Tasers, sound lasers and CS gas, combined with intrusive surveillance, infiltration and disinformation, have become standard in the playbook of law enforcement. And the central banks, whose operations most people have no clue about, are prepared to sabotage democracy by triggering bank runs where anti-neoliberal movements threaten to win – as they did with Cyprus in 2013, then Scotland and now Greece. The elite and their supporters are lined up to defend the same core principles: high finance, low wages, secrecy, militarism, intellectual property and energy based on carbon. The bad news is that they control nearly every government in the world. The good news is that in most countries they enjoy very little consent or popularity among ordinary people.

Next to the pawnbrokers you’ll probably find that other gold mine of the poverty-stricken town: the employment agency. Look in the window and you’ll see ads for jobs at the minimum wage – but which require more than minimum skill. Press operatives, carers on night shift, distribution centre workers: jobs that used to pay decent wages now pay as little as legally possible. Somewhere else, out of the limelight, you will come across people picking up the pieces: food banks run by churches and charities; Citizens’ Advice Bureaux whose main business has become advising those swamped by debt. Just one generation earlier these streets were home to thriving real businesses. I remember the main street of my home town, Leigh, in northwest England, in the 1970s, thronged on Saturday mornings with prosperous working-class families. There was full employment, high wages and high productivity.

 

pages: 323 words: 95,188

The Year That Changed the World: The Untold Story Behind the Fall of the Berlin Wall by Michael Meyer

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Ayatollah Khomeini, bank run, Berlin Wall, Bonfire of the Vanities, Bretton Woods, BRICs, call centre, Fall of the Berlin Wall, falling living standards, Francis Fukuyama: the end of history, haute couture, Mikhail Gorbachev, mutually assured destruction, Ronald Reagan, Ronald Reagan: Tear down this wall, union organizing

Bush on, 2, 5 fall of, in Bulgaria, 190–191 fall of, in Czechoslovakia, 28, 114, 128, 135–143, 175–190, 205–206 fall of, in GDR, 163–174, 203–205 fall of, in Hungary, 28, 29–39, 41–42, 46, 61, 66–74, 125, 128, 137, 139–140, 143–145, 206–207, 228–231, 236 fall of, in Poland, 28, 35–36, 43–54, 125, 128–133, 137, 139–140, 205 fall of, in Romania, 105–111, 193–201 fall of, throughout Eastern Europe, 41–42, 48, 54, 62, 173–174, 204 oppression in, 36 Reagan and, 13 as term, 224 See also Politburo Constantinescu, Emil, 201 consumer goods, 171–172, 177, 198–199 containment policy, 5, 61 Cooper, Gary, 79 Cornea, Doina, 197–198 counterculture, 21 Cousteau, Jacques, 95 crash of 2008, 218 cult of personality, 110 Cuthbertson, Ian, 228 Czechoslovakia denouement, 205–206 fall of Berlin Wall and, 8 fall of communism in, 28, 114, 128, 135–143, 175–190, 205–206, 233 Prague Spring (1968), 39, 45 refugees from GDR and, 122–123, 135, 141, 148, 152–153 reopening of border with GDR, 158–159 as totalitarian state, 135–143 Velvet Revolution (Prague; 1989), 170, 173, 175–190, 236 Warsaw Pact invasion of (1968), 105–106, 205 See also Prague Dalai Lama, 135, 206 Danner, Mark, 237 Davis, John, 231 DDR Museum (Berlin), 224 death strip (Berlin Wall), 16–18 democracy in Czechoslovakia, 185, 186, 206 in Eastern Europe, 99 in Hungary, 29–32, 41, 55–58, 110, 230–231 in Poland, 58–61, 79–84, 94, 110, 128–133, 225–226, 229–230 Reagan and, 3 U.S., 29, 30, 41 Democratic Forum, 97–99, 99 détente, 5, 61 Deutsche Bank, 73 Diensthier, Jiri, 233 Diepgen, Eberhard, 13 Dietrich, Marlene, 4 Dinescu, Mircea, 197–198 Dissolution (Maier), 163–164, 230–231, 232, 234, 235 Dresden bank runs in, 165 Freedom Train and, 124, 152–153, 154 refugees from GDR and, 117, 124, 135, 152–153, 160 rise of opposition, 152–153, 158 Dubcek, Alexander, 45, 177, 186–187, 226 Duberstein, Kenneth, 11 Dukakis, Michael, 39–40 East Berlin fall of Berlin Wall, 5–9, 65–76, 88–94, 165–173, 203–204 Jubilee of 1989 and, 115, 147–152 May Day (1989), 65–66, 69–70, 228 refugees from GDR and, 119–120, 160–161 rise of opposition, 158 See also Berlin; German Democratic Republic (GDR) Eastern Europe collapse of communism throughout, 41–42, 48, 54, 62, 173–174, 204 revolutions in, 14, 84, 216 Soviet withdrawal from, 12, 38–39, 91 See also names of specific countries East Germany.

Nikolaus Cathedral (Prague), 142 Saint Sebastian, 2 Sakharov, Andrei, 36 samizdat, 32 Schabowski, Gunter collapse of GDR and, 165–173, 204–205, 234–235 fall of Berlin Wall and, 7–10, 65, 69–70, 91, 165–173, 223, 234 Politburo and, 140–141, 148–150, 165–173 refugees from GDR and, 116–117, 120, 123–124, 133–135, 232 repudiation of communism, 204–205 rise of opposition in GDR, 155–156, 158 at Warsaw Pact summit (Bucharest; 1989), 93–94 Schirndling, 160 Schmidt, Helmut, 119 Schultz, George, 61 Schultz, Kurt-Werner, 103 Schumacher, Hans, 236 Schurer, Gerhard, 164, 235 Schwartz, Stephen, 224 Schwerin, bank runs in, 165 Scoblic, Peter, 237–238 Scowcroft, Brent, 9, 40, 60, 61, 95, 224–225, 227, 231, 232 SEATO, 21 secret police, 11–12, 25, 53, 65, 104, 106, 114, 134–136, 140, 151–152, 157, 191, 194–198, 201 Securitate (secret police in Romania), 106, 191, 194–198, 201 September 11, 2001, 2, 215 Shevardnadze, Eduard, 148 fall of Berlin Wall and, 90–91 German reunification proposal and, 125–126 refugees from GDR and, 118 replaces Gromyko, 12 Shultz, George, 75, 227 Siani-Davies, Peter, 236 Sicherman, Harvey, 227 Siegessäule (Berlin), 15 Sieland, Gisela, 19 Skoda, Jan, 185 Skoda autoworks, 185 Sleepwalking through History (Hutchings), 227 Slum Clearance (Havel), 206 Smith, Stephen, 128, 141–142 socialism Gorbachev and, 56 as term, 224 Socialist Unity Party, 26 Society for a Merrier Present (Czechoslovakia), 139 soft power, 13–14 Solidarity (Poland) elections of 1989, 79–84, 128–133, 225–226, 229–230, 233 fall of communism and, 28, 32, 35–36 Jaruzelski embraces, 45–46, 50–54, 205 origins of, 47, 52, 94 in revolution of 1989, 47–54 rise of, 50–54, 58–61 uprising of 1980, 43–46 Somalia, 210 Sopron, Hungary, Pan-European Picnic (1989), 97–104 Soviet Union, former ascent of Gorbachev within, 11–14, 25 Brezhnev Doctrine and, 39, 45, 63 collapse of, 5, 14, 45, 62, 71, 204 fall of Berlin Wall, 5–10, 90–91 fall of communism in Czechoslovakia, 28 fall of communism in Hungary, 28, 29–39, 41–42, 66–74 fall of communism in Poland, 28 flaws of Soviet system, 11–12 Hungarian revolt of 1956, 34–35 Hungary and, 38 impact of Cold War and.

 

pages: 338 words: 106,936

The Physics of Wall Street: A Brief History of Predicting the Unpredictable by James Owen Weatherall

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Albert Einstein, algorithmic trading, Antoine Gombaud: Chevalier de Méré, Asian financial crisis, bank run, Benoit Mandelbrot, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, Brownian motion, butterfly effect, capital asset pricing model, Carmen Reinhart, Claude Shannon: information theory, collateralized debt obligation, collective bargaining, dark matter, Edward Lorenz: Chaos theory, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial innovation, George Akerlof, Gerolamo Cardano, Henri Poincaré, invisible hand, Isaac Newton, iterative process, John Nash: game theory, Kenneth Rogoff, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, martingale, new economy, Paul Lévy, prediction markets, probability theory / Blaise Pascal / Pierre de Fermat, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Coase, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, statistical arbitrage, statistical model, stochastic process, The Chicago School, The Myth of the Rational Market, tulip mania, V2 rocket, volatility smile

He has just enough money that, at the close of the business day, the bank has $1 left and they can shut the doors for the night without going out of business. They have survived the run, but at the expense of Bailey’s dreams of traveling the world. Bank runs were fairly common during the Depression, and even more common during the nineteenth century. They were associated with financial panics, periods in which the economy seemed especially uncertain and no one was sure which banks would survive. A small piece of news that a particular bank was endangered could practically ensure that the bank would fail. Today, bank runs in the United States are a thing of the past, because in 1934 the U.S. government instituted the Federal Deposit Insurance Corporation (FDIC), which insures all consumer bank deposits. Now there’s no reason to make a run on a bank, even if you think it’s failing: your money is insured by the federal government, no matter what happens.

 

pages: 329 words: 95,309

Digital Bank: Strategies for Launching or Becoming a Digital Bank by Chris Skinner

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algorithmic trading, Amazon Web Services, Any sufficiently advanced technology is indistinguishable from magic, augmented reality, bank run, Basel III, bitcoin, business intelligence, business process, business process outsourcing, call centre, cashless society, clean water, cloud computing, corporate social responsibility, credit crunch, crowdsourcing, cryptocurrency, demand response, disintermediation, don't be evil, en.wikipedia.org, fault tolerance, fiat currency, financial innovation, Google Glasses, high net worth, informal economy, Infrastructure as a Service, Internet of things, Jeff Bezos, Kevin Kelly, Kickstarter, M-Pesa, margin call, mass affluent, mobile money, Mohammed Bouazizi, new economy, Northern Rock, Occupy movement, platform as a service, Ponzi scheme, prediction markets, pre–internet, quantitative easing, ransomware, reserve currency, RFID, Satoshi Nakamoto, Silicon Valley, smart cities, software as a service, Steve Jobs, strong AI, Stuxnet, trade route, unbanked and underbanked, underbanked, upwardly mobile, We are the 99%, web application, Y2K

In particular, the fact that Second Life allowed real commerce to be transacted by converting real US dollars to virtual dollars, meant that everyone started to test commerce in virtual worlds through the service. For example, several banks invested in major projects in Second Life, including ING, Wells Fargo, SAXO Bank and Deutsche Bank. However, several banks also operated in Second Life that were managed by guys in their bedrooms. These included banks such as Ginko Bank, run by a Brazilian chap at home. The trouble Ginko Bank experienced started when internet gambling was forced to close under US Laws. The management of Second Life decided that they also had to close access to gambling in virtual worlds in July 2007 to comply with this policy, which led to a major run on the virtual banks. Until this date, a lot of the commercial transactions taking place in Second Life, where people converted real US dollars to Linden dollars, were for gambling purposes apparently.

It all began when George W Bush introduced a ban on internet gambling, and any firm on US shores who offered online trading would be threatened with lengthy jail sentences. Second Life’s operators were worried that this might affect them, and hence they banned gambling too. What the operators of Second Life did not realise is that gambling was really popular in their virtual world and, as a result of the gambling lockdown, many users wanted to withdraw their funds. So began a small bank run, with one of the largest banks in Second Life at this time being Ginko Bank. Ginko Bank had L$300 million in assets – about US$1.5 million in real money. As the bank saw a mass withdrawal of funds – around L$100 million in a couple of days – the bank’s owner deleted his Second Life account. Yes, you guessed it, Ginko Bank was just a virtual bank being run by a Sao Paolo internet freak, Andre Sanchez, from his bedroom.

 

Future Files: A Brief History of the Next 50 Years by Richard Watson

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Albert Einstein, bank run, banking crisis, battle of ideas, Black Swan, call centre, carbon footprint, cashless society, citizen journalism, computer age, computer vision, congestion charging, corporate governance, corporate social responsibility, deglobalization, digital Maoism, disintermediation, epigenetics, failed state, financial innovation, Firefox, food miles, future of work, global supply chain, global village, hive mind, industrial robot, invention of the telegraph, Jaron Lanier, Jeff Bezos, knowledge economy, linked data, low skilled workers, M-Pesa, Northern Rock, peak oil, pensions crisis, precision agriculture, prediction markets, Ralph Nader, Ray Kurzweil, rent control, RFID, Richard Florida, self-driving car, speech recognition, telepresence, the scientific method, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Turing test, Victor Gruen, white flight, women in the workforce, Zipcar

The serious point here is that life is blurring between the real and the virtual, and financial services are no exception. People are Money and Financial Services 131 already exchanging real money for virtual goods and vice versa, so why not invent new products and services for this market? Several US-based retailers (including a real bank) have opened virtual branches inside virtual games, so why not open a bank-run virtual currency-trading exchange where gamers can exchange their World of Witchcraft EU gold or Second Life Linden dollars for real gold or US dollars? If that’s a bit too weird for you, how about a real credit card that earns the virtual currency of your choice when you buy a pair of real jeans or an iPod? It could work the other way around too: a real card personalized with a picture of your avatar that earns points every time you spend real money on virtual goods (like virtual clothes or real estate for your avatar).

In a fast-paced, globalized world, the love of the new dominates. But in a downturn, security will be paramount and new entrants and foreign banks will be rejected in favor of long-established local names. Except, that is, if the name includes words like “Northern” and “Rock”. I was in Australia in 2007 when the UK’s fifth-largest mortgage lender became the first bank in Britain since 1866 to be the subject of a bank run. There were people queuing down high streets all over the country trying to get their cash out, until the government agreed to use taxpayers’ money to guarantee their savings. It effectively said that it would bail out anyone who invested 140 FUTURE FILES in a major UK financial institution that had forgotten that there should be some balance between borrowing and lending. The problem, of course, was that Northern Rock was too clever by half.

 

pages: 1,088 words: 228,743

Expected Returns: An Investor's Guide to Harvesting Market Rewards by Antti Ilmanen

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Andrei Shleifer, asset allocation, asset-backed security, availability heuristic, backtesting, balance sheet recession, bank run, banking crisis, barriers to entry, Bernie Madoff, Black Swan, Bretton Woods, buy low sell high, capital asset pricing model, capital controls, Carmen Reinhart, central bank independence, collateralized debt obligation, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, deglobalization, delta neutral, demand response, discounted cash flows, disintermediation, diversification, diversified portfolio, dividend-yielding stocks, equity premium, Eugene Fama: efficient market hypothesis, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, framing effect, frictionless, frictionless market, George Akerlof, global reserve currency, Google Earth, high net worth, hindsight bias, Hyman Minsky, implied volatility, income inequality, incomplete markets, index fund, inflation targeting, interest rate swap, invisible hand, Kenneth Rogoff, laissez-faire capitalism, law of one price, Long Term Capital Management, loss aversion, margin call, market bubble, market clearing, market friction, market fundamentalism, market microstructure, mental accounting, merger arbitrage, mittelstand, moral hazard, New Journalism, oil shock, p-value, passive investing, performance metric, Ponzi scheme, prediction markets, price anchoring, price stability, principal–agent problem, private sector deleveraging, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Robert Shiller, Robert Shiller, savings glut, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stochastic volatility, systematic trading, The Great Moderation, The Myth of the Rational Market, too big to fail, transaction costs, tulip mania, value at risk, volatility arbitrage, volatility smile, working-age population, Y2K, yield curve, zero-coupon bond

Thoughts on the origins of the financial crisis The big picture is that the crisis followed the broad underpricing of risk in several asset classes amid persistently loose financial conditions. Recall Alan Greenspan’s warning during the boom years: “History has not dealt kindly with the aftermath of protracted periods of low risk premia.” A related interpretation is that the crisis was a modern-day bank run, where a bank run is defined as loss of confidence in a given bank, an asset class, or even the whole financial system. There was arguably too much trust and confidence during the preceding years, leading to complacency and excessive risk taking. Modern financial markets rely on liquidity. Once trust and confidence vanished, so did market liquidity in several assets. Lawrence Summers said in the midst of the crisis: “We got here because there was too much greed and too little fear.

In many real-world cases, the investment horizon is uncertain (and the perceived horizon is often positively related to market conditions and investor risk appetite). Banks, central banks, and corporations tend to have a short horizon, while customer deposits, FX reserves, and excess cash tend to be held for long periods. These institutions need to be prepared to satisfy sudden cash demands (such as are caused by a bank run, currency crisis, or various corporate expenses). Endowments, foundations, and sovereign wealth funds are closest to having permanent capital, but the first two have recurring spending needs each year, whereas the sovereign wealth funds of some commodity-rich countries can expect their net inflows to grow for another decade and net outflows to start only in the distant future. Time diversification Time diversification—the idea that stock market investing becomes less risky with a longer horizon—is a contentious issue.

 

pages: 823 words: 206,070

The Making of Global Capitalism by Leo Panitch, Sam Gindin

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accounting loophole / creative accounting, airline deregulation, anti-communist, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Basel III, Big bang: deregulation of the City of London, bilateral investment treaty, Branko Milanovic, Bretton Woods, BRICs, British Empire, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collective bargaining, continuous integration, corporate governance, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency peg, dark matter, Deng Xiaoping, disintermediation, ending welfare as we know it, eurozone crisis, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, full employment, Gini coefficient, global value chain, guest worker program, Hyman Minsky, imperial preference, income inequality, inflation targeting, interchangeable parts, interest rate swap, Kenneth Rogoff, land reform, late capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, manufacturing employment, market bubble, market fundamentalism, Martin Wolf, means of production, money: store of value / unit of account / medium of exchange, Monroe Doctrine, moral hazard, mortgage debt, mortgage tax deduction, new economy, non-tariff barriers, Northern Rock, oil shock, precariat, price stability, quantitative easing, Ralph Nader, RAND corporation, regulatory arbitrage, reserve currency, risk tolerance, Ronald Reagan, seigniorage, shareholder value, short selling, Silicon Valley, sovereign wealth fund, special drawing rights, special economic zone, structural adjustment programs, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, very high income, Washington Consensus, Works Progress Administration, zero-coupon bond

As late as July 2007, Tim Geithner at the New York Federal Reserve and Hank Paulson at the Treasury were still playing their appointed role of trying to calm markets with reassuring speeches about the housing slump being “at or near bottom,” and financial markets outside the US being “now deeper and more liquid than they used to be.”31 But by this time an unraveling of financial positions and credit chains was already producing a liquidity crunch in the US commercial paper and money markets that had become so pivotal in global finance. It was the difficulty of raising funds on these markets that forced France’s largest bank, BNS Paribas, on August 9, 2007, to suspend payments due on three of its investment funds. By September Northern Rock, the UK’s fifth-largest lender, had gone to the Bank of England for emergency support, leading to a classic bank run. Within days the UK government had guaranteed Northern Rock’s deposits, and the Bank of England announced that it would provide loans to keep the bank going and extend the same support to other banks. Although President Bush declared in a major speech on the crisis at the end of August that “the government has got a role to play—but it’s limited,” the Treasury had by the beginning of that month already switched to full crisis-management mode, with Paulson “in hourly contact with the Fed, other officials in the administration, finance ministries and regulators overseas and people on Wall Street.”32 Meanwhile, the Fed was in contact with the European Central Bank, the Bank of Japan, and the Bank of England about the role they would all play as lenders of last resort.

See also Karen Weaver, “US Asset-Backed Securities Market: Review and Outlook,” in Global Securitization and Structured Finance, Deutsche Bank, 2008. Available at globalsecuritisation.com. 29 Deborah Solomon, “Questions for Paul O’Neill: Market Leader,” New York Times, March 30, 2008. 30 Ben Bernanke, “GSE Portfolios, Systemic Risk and Affordable Housing,” speech to the Independent Community Bankers of America’s Annual Convention, Honolulu, March 6, 2007. 31 Both quotes are from Gretchen Morgenson, “The Bank Run We Knew So Little About,” New York Times, April 3, 2011. 32 Vikas Bajaj, “Central Banks Intervene to Calm Volatile Markets,” New York Times, August 1, 2007. For the Bush speech, see Gillian Tett, Fool’s Gold, London: Little, Brown, 2009, p. 227. 33 Quoted in Peter Baker, “A Professor and a Banker Bury Old Dogma on Markets,” New York Times, September 20, 2008. See Ben Bernanke, “Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression,” American Economic Review 73: 3 (June 1983); and Essays on the Great Depression, Princeton: Princeton University Press, 2000. 34 See Bank for International Settlements, “The International Interbank Market: A Descriptive Study,” BIS Papers 8, Monetary and Economic Department, July 1983; and David Gaffen, “The Meaning of LIBOR,” Wall Street Journal, September 7, 2007. 35 The leading borrowers in the months to come were Citibank ($3.5 billion in September), Deutsche Bank ($2.4 billion in November) and Calyon of France ($2 billion in December).

See Ben Bernanke, “Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression,” American Economic Review 73: 3 (June 1983); and Essays on the Great Depression, Princeton: Princeton University Press, 2000. 34 See Bank for International Settlements, “The International Interbank Market: A Descriptive Study,” BIS Papers 8, Monetary and Economic Department, July 1983; and David Gaffen, “The Meaning of LIBOR,” Wall Street Journal, September 7, 2007. 35 The leading borrowers in the months to come were Citibank ($3.5 billion in September), Deutsche Bank ($2.4 billion in November) and Calyon of France ($2 billion in December). See Morgenson, “The Bank Run We Knew So little About”; Jody Shenn, “Bank of China New York Branch Was Second-Largest Fed Borrower in Aug. 2007,” Bloomberg, March 31, 2011; and Bradley Keoun and Craig Torres, “Foreign Banks Tapped Fed’s Secret Lifeline Most at Crisis Peak,” Bloomberg, April 1, 2011. 36 Michael Shedlock, “Banks Worldwide Engage in Global Coordinated Panic,” Seeking Alpha, December 14, 2007. This was undertaken around the same time as the Fed also launched a Term Auction Facility program to allocate funds to US depository institutions against a wide variety of collateral.

 

pages: 543 words: 157,991

All the Devils Are Here by Bethany McLean

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Asian financial crisis, asset-backed security, bank run, Black-Scholes formula, call centre, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Exxon Valdez, fear of failure, financial innovation, fixed income, high net worth, Home mortgage interest deduction, interest rate swap, laissez-faire capitalism, Long Term Capital Management, margin call, market bubble, market fundamentalism, Maui Hawaii, moral hazard, mortgage debt, Northern Rock, Own Your Own Home, Ponzi scheme, quantitative trading / quantitative finance, race to the bottom, risk/return, Ronald Reagan, Rosa Parks, shareholder value, short selling, South Sea Bubble, statistical model, telemarketer, too big to fail, value at risk

Suddenly a routine repo transaction would be transformed into something far more ominous: a vote on whether an investment bank should survive. Thanks to deposit insurance, the days were long gone when bank customers stood in line to pull their money out of a shaky bank, creating a run on the bank that usually ended in its collapse. But as Gorton and fellow Yale economist Andrew Metrick would later argue in a paper, the repo market created the conditions for the modern version of the bank run. You never saw this kind of bank run in photographs, but it was every bit as devastating. Where were the regulators as this buildup of risk was taking place? They were nowhere to be found. Just as the banking regulators had averted their eyes from the predatory lending on Main Street, so did they now ignore the ferocious accumulation of risk, much of it tied to subprime mortgages, on Wall Street. No regulator had the authority—or the ability—to systematically look across institutions and identify potential system-wide problems.

 

pages: 435 words: 127,403

Panderer to Power by Frederick Sheehan

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Asian financial crisis, asset-backed security, bank run, banking crisis, Bretton Woods, British Empire, call centre, central bank independence, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, deindustrialization, diversification, financial deregulation, financial innovation, full employment, inflation targeting, interest rate swap, inventory management, Isaac Newton, Long Term Capital Management, margin call, market bubble, McMansion, Menlo Park, mortgage debt, new economy, Northern Rock, oil shock, place-making, Ponzi scheme, price stability, reserve currency, rising living standards, rolodex, Ronald Reagan, Sand Hill Road, savings glut, shareholder value, Silicon Valley, Silicon Valley startup, South Sea Bubble, supply-chain management, supply-chain management software, The Great Moderation, too big to fail, transaction costs, trickle-down economics, VA Linux, Y2K, Yom Kippur War

Effective banking supervision has helped foster a banking system in the United States that today is safe, sound, and well-capitalized. . . . Fortunately, this recent period of turbulence in financial markets has occurred at a time when U.S. commercial banks are strongly capitalized, reflecting years of robust profits.”36 Bernanke seemed incapable of learning from his own experience. In August, Countrywide Bank, a part of Angelo Mozilo’s empire, suffered a bank run when depositors fought their way into Countrywide branches. By that time, the Implode-O-Meter Web site listed 126 imploded mortgage companies, including 10 that closed up shop the same week.37 Yet, Bernanke told a group of central bankers and economists in October that he had no way of knowing if there had been a housing bubble.38 33 Frederic S. Mishkin, “Enterprise Risk Management and Mortgage Lending,” speech at the Forecaster’s Club of New York, New York, January 17, 2007; in addition to Mishkin and Bernanke, there were two other authors of Inflation Targeting (Princeton, NJ.: Princeton University Press, 2001): Thomas Laubach and Adam S.

In London, he told the Daily Telegraph that “Britain is more exposed than we are [to mortgage defaults]—in the sense that you have a good deal more adjustable-rate mortgages.”17 That would seem to contradict his variable-rate advice in February 2004, when he advised Americans to look overseas, “where adjustable-rate mortgages are far more common.”18 His statement to the Telegraph was on September 17, in the midst of a bank run on Northern Rock, a British bank. He may not have heightened the hysteria sweeping Britain, but he could have kept his mouth shut. 14 Interview with Leslie Stahl, 60 Minutes, September 16, 2007. 15 Jane Wardell, “Greenspan Defends Subprime,” Associated Press, October 2, 2007. 16“World Markets Still Affected by Fear: Greenspan,” Le Figaro, September 23, 2007. 17“UK More Vulnerable than America to the Credit Crunch, Greenspan says,” Daily Te l eg raph (London), September 18, 2007.

 

pages: 545 words: 137,789

How Markets Fail: The Logic of Economic Calamities by John Cassidy

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Albert Einstein, Andrei Shleifer, anti-communist, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black-Scholes formula, Bretton Woods, British Empire, capital asset pricing model, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, George Akerlof, global supply chain, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, laissez-faire capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, Mont Pelerin Society, moral hazard, mortgage debt, Naomi Klein, Network effects, Nick Leeson, Northern Rock, paradox of thrift, Ponzi scheme, price discrimination, price stability, principal–agent problem, profit maximization, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, RAND corporation, random walk, Renaissance Technologies, rent control, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, unorthodox policies, value at risk, Vanguard fund

Since each depositor is in the same position, the possibility of a “run” on the bank is very real. Between 1929 and 1932, more than five thousand banks went out of business, and in early 1933, there was another big wave of failures as depositors in many states rushed to get out their money. The panic was stemmed only when FDR, the new president, declared a bank holiday, during which he introduced a federal system of deposit insurance. Since then, bank runs have been rare. Deposit insurance provides an effective means of dealing with the problem of hidden information, but it creates moral hazard. If a bank gets into serious trouble, the government will make good the deposits of all its customers up to an agreed limit, which was recently raised to $250,000. Having this backstop gives the managers and owners of banks an incentive to act irresponsibly.

Since this incentive structure is common knowledge, withdrawing money immediately is a dominant strategy. The inevitable result, fans of Jimmy Stewart and the 1946 Frank Capra film It’s a Wonderful Life won’t need reminding, is a run on the bank. During early March, rumors about Bear’s financial health began to circulate. Many Bear employees suspected that short sellers were spreading malicious stories to drive down the firm’s stock. The worst thing about bank runs is that they can be self-fulfilling: once the logic of the prisoner’s dilemma takes over, even an economically sound institution can be felled. To this day, Bear’s senior executives insist the firm was in this category. Its mortgage exposures, although considerable, were smaller than those of many of its rivals. (It had $2 billion in subprime securities, $15 billion in prime and Alt-A securities, and $16 billion in commercial mortgage bonds.)

 

pages: 393 words: 115,263

Planet Ponzi by Mitch Feierstein

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Affordable Care Act / Obamacare, Albert Einstein, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Bernie Madoff, centre right, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, disintermediation, diversification, Donald Trump, energy security, eurozone crisis, financial innovation, financial intermediation, Flash crash, floating exchange rates, frictionless, frictionless market, high net worth, High speed trading, illegal immigration, income inequality, interest rate swap, invention of agriculture, Long Term Capital Management, moral hazard, mortgage debt, Northern Rock, obamacare, offshore financial centre, oil shock, pensions crisis, Plutocrats, plutocrats, Ponzi scheme, price anchoring, price stability, purchasing power parity, quantitative easing, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, too big to fail, trickle-down economics, value at risk, yield curve

One of the really astonishing aspects of these stories is how little those involved seem to have learned. The chairman of Northern Rock, Matt Ridley, was interrogated by British parliamentarians in the wake of the crisis‌—‌a crisis that had prompted the first bank run in Britain for 150 years. Instead of sounding apologetic or humble about his failures, Ridley sounded plaintive. He complained: ‘The idea that all markets would close simultaneously was unforeseen by any major authority. We were hit by an unexpected and unpredictable concatenation of events.’14 Well, duh! Of course you don’t expect the unexpected. That’s why you take precautions and prudently manage your risks accordingly. The fact that Britain hadn’t experienced a bank run for 150 years suggests that those precautions were hardly unknown to Ridley’s predecessors. But in the era of the Ponzi scheme, why burden yourself with common sense, when you can just press the pedal to the metal and see how far you can travel before the engine blows?

 

pages: 478 words: 126,416

Other People's Money: Masters of the Universe or Servants of the People? by John Kay

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Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, call centre, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, cognitive dissonance, corporate governance, Credit Default Swap, cross-subsidies, dematerialisation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, Elon Musk, Eugene Fama: efficient market hypothesis, eurozone crisis, financial innovation, financial intermediation, fixed income, Flash crash, forward guidance, Fractional reserve banking, full employment, George Akerlof, German hyperinflation, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, income inequality, index fund, inflation targeting, interest rate derivative, interest rate swap, invention of the wheel, Irish property bubble, Isaac Newton, London Whale, Long Term Capital Management, loose coupling, low cost carrier, M-Pesa, market design, millennium bug, mittelstand, moral hazard, mortgage debt, new economy, Nick Leeson, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shock, passive investing, peer-to-peer lending, performance metric, Peter Thiel, Piper Alpha, Ponzi scheme, price mechanism, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, random walk, regulatory arbitrage, Renaissance Technologies, rent control, Richard Feynman, risk tolerance, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, Schrödinger's Cat, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, sovereign wealth fund, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, Steve Wozniak, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tobin tax, too big to fail, transaction costs, tulip mania, Upton Sinclair, Vanguard fund, Washington Consensus, We are the 99%, Yom Kippur War

A Senate inquiry into these events was led by a brilliant chief counsel, Ferdinand Pecora, who single-handedly destroyed the reputations of many Wall Street institutions and Wall Street figures. The Glass–Steagall Act of 1933 imposed the separation of commercial and investment banking. The House of Morgan was divided into J.P. Morgan, the commercial banking arm, and Morgan Stanley, an investment bank. The Federal Deposit Insurance Corporation (FDIC) would in future insure depositors against losses from bank runs or bank failures. In both Britain and the USA different functions within the financial system were provided by different institutions. Commercial banks operated the payments system and met the short-term lending needs of their customers. Investment banks (then called ‘merchant banks’ in the UK) handled larger transactions involving the issue of securities. If the buyer wanted to sell these securities, he or she would contact a stockbroker, who would negotiate the trade with a specialist (also called a jobber or market-maker).

The financial analogue of the spare pint is the necessity for businesses and households to maintain monetary balances. In extreme cases of illiquidity, households end up hoarding cash under the bed. These supply chain inefficiencies may be costly, in both the milk supply chain and the money market. In September 2007 a picture of depositors queuing up to withdraw money from Northern Rock, a small British mortgage lender, made the front page of every national newspaper. This was a ‘bank run’, when everyone was attempting to withdraw their deposits before the cash was exhausted. But financial services are not unique in their vulnerability to runs. If people suspect there is not enough milk, they will queue to obtain whatever milk is available, and the fears of shortage will prove – temporarily – justified. This does happen for non-financial commodities, but not very often. There was a time in Britain in the 1970s when the oil crisis and a wave of strikes disrupted the supply chains for everyday commodities, and panic buying led to shortages.

 

pages: 466 words: 127,728

The Death of Money: The Coming Collapse of the International Monetary System by James Rickards

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Affordable Care Act / Obamacare, Asian financial crisis, asset allocation, Ayatollah Khomeini, bank run, banking crisis, Ben Bernanke: helicopter money, bitcoin, Black Swan, Bretton Woods, BRICs, business climate, capital controls, Carmen Reinhart, central bank independence, centre right, collateralized debt obligation, collective bargaining, complexity theory, computer age, credit crunch, currency peg, David Graeber, debt deflation, Deng Xiaoping, diversification, Edward Snowden, eurozone crisis, fiat currency, financial innovation, financial intermediation, financial repression, Flash crash, floating exchange rates, forward guidance, George Akerlof, global reserve currency, global supply chain, Growth in a Time of Debt, income inequality, inflation targeting, invisible hand, jitney, Kenneth Rogoff, labor-force participation, labour mobility, Lao Tzu, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market clearing, market design, money: store of value / unit of account / medium of exchange, mutually assured destruction, obamacare, offshore financial centre, oil shale / tar sands, open economy, Plutocrats, plutocrats, Ponzi scheme, price stability, quantitative easing, RAND corporation, reserve currency, risk-adjusted returns, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Satoshi Nakamoto, Silicon Valley, Silicon Valley startup, Skype, sovereign wealth fund, special drawing rights, Stuxnet, The Market for Lemons, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, too big to fail, trade route, uranium enrichment, Washington Consensus, working-age population, yield curve

Merchants sought scarce dollars on the black market at exchange rates that made the rial worth less than half its previous value, the equivalent of 100 percent inflation. A run on the Iranian banking system commenced, as depositors tried to get their rials out to purchase black-market currencies or hard assets to preserve wealth. The government raised interest rates in an effort to stop the run on the banks. The United States had inflicted a currency collapse, hyperinflation, and a bank run and had caused a scarcity of food, gasoline, and consumer goods, through the expedient of cutting Iran out of the global payments system. Iran fought back, even before the escalation of U.S. efforts, by dumping dollars and buying gold to prevent the United States or its allies from freezing its dollar balances. India is a major Iranian oil importer, and the two trading partners took steps to implement an oil-for-gold swap, whereby India would buy gold on global markets and swap it with Iran for oil shipments.

The potentially destabilizing factor is that the amount of gold subject to paper contracts is one hundred times the amount of physical gold backing those contracts. As long as holders remain in paper contracts, the system is in equilibrium. If holders in large numbers were to demand physical delivery, they could be snowflakes on an unstable mountain of paper gold. When other holders realize that the physical gold will run out before they can redeem their contracts for bullion, the slide can cascade into an avalanche, a de facto bank run, except the banks in this case are the gold warehouses that support the exchanges and ETFs. This is what happened in 1969 as European trading partners of the United States began cashing in dollars for physical gold. President Nixon shut the window on these redemptions in August 1971. If he had not done so, the U.S. gold vaults at Fort Knox would have been stripped bare by the late 1970s. A similar dynamic commenced on October 4, 2012, when spot gold prices hit an interim peak of $1,790 per ounce.

 

pages: 493 words: 132,290

Vultures' Picnic: In Pursuit of Petroleum Pigs, Power Pirates, and High-Finance Carnivores by Greg Palast

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anti-communist, back-to-the-land, bank run, Berlin Wall, Bernie Madoff, British Empire, capital asset pricing model, capital controls, centre right, Chelsea Manning, clean water, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, Donald Trump, energy security, Exxon Valdez, invisible hand, means of production, offshore financial centre, random walk, Ronald Reagan, sensible shoes, transfer pricing, uranium enrichment, Washington Consensus, Yogi Berra

Apparently, Summers and Rubin never made a major economic policy decision without measuring the implications for Rubin’s former bank. They thought of it as a fine way to test their policies against The Market’s expected reaction. Stiglitz thought it sick, bad governance, and a blatant conflict of interest. He pointed that out and got no more than a look one would give a child that doesn’t understand the ways of the adult world. In regard to letting banks run wild worldwide, Stiglitz raised some questions and got more tolerant “you’ll see when you grow up” looks. In 2008, when Barack Obama was elected by a nation in deep economic recession, the President-Elect waited barely a week before picking his economic cabinet: Larry Summers to the new post of Economics Czar and Tim Geithner as Czarina, Secretary of the Treasury. Stiglitz and others who successfully warned of the fires that would erupt from bank de-control were passed over.

Palacio really had no choice: ministers can’t run off on their own ponies cutting deals, even life-saving deals. In Ecuador’s December 2006 election, the IMF and international banks were counting on the owner of the biggest banana plantation in this banana republic to be returned to the presidency. But Correa, which means “The Belt” in Spanish, whipped him. The country’s credit rating, in bad shape, fell apart. Correa grinned. Ecuador’s agreement to pay off the losses of banks run by straight-out crooks had been coerced out of Palacio’s and Correa’s psychotic predecessors. (There are more psycho presidents in history than I can count, from Iran to the USA. But Ecuador’s Abdala Bucaram, removed in 1997, had an official medical diagnosis.) Correa’s presidential campaign anthem was Twisted Sister’s “We’re Not Gonna Take It.” Sure. I’d heard that before, from his predecessors.

 

pages: 515 words: 132,295

Makers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar

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3D printing, accounting loophole / creative accounting, additive manufacturing, Airbnb, algorithmic trading, Asian financial crisis, asset allocation, bank run, Basel III, bonus culture, Bretton Woods, British Empire, call centre, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, centralized clearinghouse, clean water, collateralized debt obligation, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, crowdsourcing, David Graeber, deskilling, Detroit bankruptcy, diversification, Double Irish / Dutch Sandwich, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial deregulation, financial intermediation, Frederick Winslow Taylor, George Akerlof, gig economy, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, High speed trading, Home mortgage interest deduction, housing crisis, Howard Rheingold, Hyman Minsky, income inequality, index fund, interest rate derivative, interest rate swap, Internet of things, invisible hand, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, knowledge economy, labor-force participation, labour mobility, London Whale, Long Term Capital Management, manufacturing employment, market design, Martin Wolf, moral hazard, mortgage debt, mortgage tax deduction, new economy, non-tariff barriers, offshore financial centre, oil shock, passive investing, pensions crisis, Ponzi scheme, principal–agent problem, quantitative easing, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, Rana Plaza, RAND corporation, random walk, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, Second Machine Age, shareholder value, sharing economy, Silicon Valley, Silicon Valley startup, Snapchat, sovereign wealth fund, Steve Jobs, technology bubble, The Chicago School, The Spirit Level, The Wealth of Nations by Adam Smith, Tim Cook: Apple, Tobin tax, too big to fail, trickle-down economics, Tyler Cowen: Great Stagnation, Vanguard fund

Senator Glass, along with Congressman Henry Steagall, crafted the Glass-Steagall Act to separate commercial and investment banking in the United States. For more than six decades afterward, the law helped to ring-fence commercial lending from risky proprietary trading. Glass-Steagall also created the Federal Deposit Insurance Corporation (FDIC), which insured bank depositors up to $5,000 each, reducing the risk of bank runs and assuring the general public that it would be safe in case of a financial crisis. Finally, the legislation put limits on the amount of interest that banks could offer savers to attract their money. This measure, known as Regulation Q, was designed in part to prevent banks from competing too vigorously with one another for deposits by offering higher and higher interest rates, which might in turn push them into the sort of risky investments that had precipitated Black Tuesday in 1929.

The idea behind all of it was to make banking a safe, boring utility, something that facilitated business rather than disrupted it or competed with it for investment. And it worked, at least for a few decades. The period between the Great Depression and the 1960s was one in which banking was held largely in check, providing mostly plain-vanilla services to average people. Think of the 1946 movie It’s a Wonderful Life, in which Jimmy Stewart’s character, George Bailey, stems a bank run with a famous monologue explaining the local building and loan as the glue holding the community together: “The money’s not here. Your money’s in Joe’s house that’s right next to yours. And in the Kennedy house and Mrs. Macklin’s house and a hundred others.” Bankers of the time thought of themselves not as dealmakers but as stewards of individual wealth and lubricators of industry. They were people who turned savings into investments.

 

pages: 200 words: 54,897

Flash Boys: Not So Fast: An Insider's Perspective on High-Frequency Trading by Peter Kovac

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bank run, barriers to entry, bash_history, Bernie Madoff, Flash crash, housing crisis, index fund, locking in a profit, London Whale, market microstructure, merger arbitrage, prediction markets, price discovery process, Sergey Aleynikov, Spread Networks laid a new fibre optics cable between New York and Chicago, transaction costs, zero day

What actually happens is this: his order to buy shares executes at $100.05, the price he expected, and his order to sell executed at $100.01, the price he expected. The real issue isn’t the prices he received – which are exactly what he asked for – but rather how the information about his order in a “dark” pool was known to somebody. That is troubling, and worth probing. Dark pools don’t disseminate market data to any of their clients, high-frequency or otherwise. But, as Lewis points out, clients didn’t know “whether the Wall Street bank [running the dark pool] allowed its own proprietary traders to know of the big buy order.” This is absolutely true. Some dark pool operators make no guarantees about their own trading in the dark pool. For those that promise that their bank’s proprietary traders have no special advantages, it’s still blind faith: unlike the public markets, there are few police on this beat. For this reason, many high-frequency traders choose not to trade in dark pools – they are afraid that the banks’ traders will rip them off in the dark.

 

pages: 322 words: 77,341

I.O.U.: Why Everyone Owes Everyone and No One Can Pay by John Lanchester

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asset-backed security, bank run, banking crisis, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black-Scholes formula, Celtic Tiger, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, diversified portfolio, double entry bookkeeping, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, fixed income, George Akerlof, greed is good, hindsight bias, housing crisis, Hyman Minsky, interest rate swap, invisible hand, Jane Jacobs, John Maynard Keynes: Economic Possibilities for our Grandchildren, laissez-faire capitalism, liquidity trap, Long Term Capital Management, loss aversion, Martin Wolf, mortgage debt, mortgage tax deduction, mutually assured destruction, new economy, Nick Leeson, Northern Rock, Own Your Own Home, Ponzi scheme, quantitative easing, reserve currency, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, South Sea Bubble, statistical model, The Great Moderation, the payments system, too big to fail, tulip mania, value at risk

That problem is global, both in its consequences and in its incidence. In one form or another, balance sheet abysses of this sort are responsible for all the collapses we’ve seen. Perhaps we can experience a twinge of national pride at the thought that this planetwide problem began with Northern Rock, which in September 2007 experienced the single most dreaded event which can overtake any financial institution, not seen in Britain for more than a century: a bank run. So many people turned up in person to withdraw money that the bank ended up paying out 5 percent of its total assets, a cool £1 billion in cash. Perhaps we can also experience a twinge of nostalgia at the fact that at the time of its nationalization a few months later, the £25 billion Northern Rock bailout was the biggest sum any government anywhere in the world had ever given to a private company.

 

pages: 287 words: 81,970

The Dollar Meltdown: Surviving the Coming Currency Crisis With Gold, Oil, and Other Unconventional Investments by Charles Goyette

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bank run, banking crisis, Ben Bernanke: helicopter money, Berlin Wall, Bernie Madoff, Bretton Woods, British Empire, Buckminster Fuller, California gold rush, currency manipulation / currency intervention, Deng Xiaoping, diversified portfolio, Elliott wave, fiat currency, fixed income, Fractional reserve banking, housing crisis, If something cannot go on forever, it will stop, index fund, Lao Tzu, margin call, market bubble, McMansion, money: store of value / unit of account / medium of exchange, mortgage debt, oil shock, peak oil, pushing on a string, reserve currency, rising living standards, road to serfdom, Ronald Reagan, Saturday Night Live, short selling, Silicon Valley, transaction costs

QUESTION: But in the last chapter you raised the issue of confiscation and the possibility that safety deposit boxes may have to be opened in the presence of an inspector. ANSWER: Anything can happen and it is useless to consider the possibilities when it is too late. For the time being safety deposit boxes may be safe. You are likely to be better off buying gold and keeping it in a safety deposit box if you must, than not having any at all. But do keep in mind that we have already experienced bank runs in the current crisis. Banks can close in the event of a monetary breakdown or a bank holiday. QUESTION: What about the risk of the exchange-traded funds like GLD being nationalized? That’s a lot of gold up for grabs. ANSWER: The growing mountains of gold in exchange-traded funds may indeed be an attractive target for government plunder, even though the $35 billion in market capitalization early in 2009 of the two gold ETFs is not enough to make a dent in the government’s financial predicament.

 

pages: 261 words: 64,977

Pity the Billionaire: The Unexpected Resurgence of the American Right by Thomas Frank

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Affordable Care Act / Obamacare, bank run, big-box store, bonus culture, collateralized debt obligation, collective bargaining, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Deng Xiaoping, financial innovation, housing crisis, invisible hand, Naomi Klein, obamacare, payday loans, profit maximization, profit motive, road to serfdom, Ronald Reagan, shareholder value, strikebreaker, The Chicago School, The Myth of the Rational Market, Thorstein Veblen, too big to fail, union organizing, Washington Consensus, white flight, Works Progress Administration

It is a lesson that goes back to the earliest bailouts of them all, the ones orchestrated by the Reconstruction Finance Corporation (RFC) under Presidents Hoover and Roosevelt. Under Herbert Hoover, the bailout agency’s doings were enormously unpopular, thanks to episodes that should sound very familiar to us today. In 1932, the RFC went to the rescue of railroads that were essentially fronts for Wall Street interests. (Like AIG!) Then it poured money into a big Chicago bank run by the man who had been not only the RFC’s chairman a few weeks before, but also Calvin Coolidge’s vice president. (Cronyism!) And it did these things while denying funds to cities that had run out of money to pay schoolteachers. (Where’s my bailout?)3 Although it was almost never mentioned in our present-day debates over the legacy of Franklin Roosevelt, those bad bailouts were one of the targets of Roosevelt’s famous “forgotten man” speech of 1932, in which he charged that “the infantry of our economic army” had been overlooked while Hoover dispensed billions to the “big banks, the railroads, and the corporations of the nation.”4 Did FDR’s criticism of the bailouts mean there would be no more of them?

 

pages: 202 words: 66,742

The Payoff by Jeff Connaughton

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algorithmic trading, bank run, banking crisis, Bernie Madoff, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cuban missile crisis, desegregation, Flash crash, locking in a profit, London Interbank Offered Rate, London Whale, Long Term Capital Management, naked short selling, Plutocrats, plutocrats, Ponzi scheme, risk tolerance, short selling, Silicon Valley, too big to fail, two-sided market, young professional

One report by researchers at the Bank of International Settlements estimated that the size of the overall repo market in the United States, the U.K., and the euro zone totaled approximately $11 trillion at the end of 2007. Incredibly, that was almost $5 trillion more than the total value of domestic bank deposits at that time, which was less than $7 trillion. The overreliance on such wholesale financing made the entire financial system vulnerable to a bank run, as during the Great Depression (before we instituted a system of deposit insurance and strong bank supervision). Remarkably, although there is a prudential cap on the amount of deposits the largest banks can hold, nothing limits bank liabilities like repos, which often must be rolled over every day. Brown-Kaufman would correct that problem by placing restrictions on the size of these liabilities at both bank and non-bank financial institutions.

 

pages: 289 words: 77,532

The Secret Club That Runs the World: Inside the Fraternity of Commodity Traders by Kate Kelly

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Bakken shale, bank run, Credit Default Swap, diversification, fixed income, Gordon Gekko, index fund, locking in a profit, London Interbank Offered Rate, Long Term Capital Management, margin call, paper trading, peak oil, Ponzi scheme, risk tolerance, Ronald Reagan, side project, Silicon Valley, sovereign wealth fund, supply-chain management, the market place

He began waiting for an opportune dip in which to buy a new set of options betting that oil would go higher. Then came September. In the course of a week, the very sorts of events that Andurand and others had feared all summer actually came to pass: a teetering Merrill Lynch was sold to Bank of America in a last-minute deal, and Goldman Sachs and Morgan Stanley rapidly converted into bank holding companies that could borrow from the government in order to assuage investors’ terrors about a future bank run. The century-and-a-half-old investment bank Lehman Brothers filed for Chapter 11 bankruptcy protection. The insurer American International Group, beleaguered by bad investments in subprime mortgages that were now creating windfalls for traders to whom AIG had sold insurance policies to guard against defaults in those very same loans, had to accept a massive government bailout. It was another roller-coaster period in the oil markets, but this time they were spinning downward.

 

pages: 237 words: 64,411

Humans Need Not Apply: A Guide to Wealth and Work in the Age of Artificial Intelligence by Jerry Kaplan

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Affordable Care Act / Obamacare, Amazon Web Services, asset allocation, autonomous vehicles, bank run, bitcoin, Brian Krebs, buy low sell high, Capital in the Twenty-First Century by Thomas Piketty, combinatorial explosion, computer vision, corporate governance, crowdsourcing, en.wikipedia.org, Erik Brynjolfsson, estate planning, Flash crash, Gini coefficient, Goldman Sachs: Vampire Squid, haute couture, hiring and firing, income inequality, index card, industrial robot, invention of agriculture, Jaron Lanier, Jeff Bezos, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, Loebner Prize, Mark Zuckerberg, mortgage debt, natural language processing, Own Your Own Home, pattern recognition, Satoshi Nakamoto, school choice, Schrödinger's Cat, Second Machine Age, self-driving car, sentiment analysis, Silicon Valley, Silicon Valley startup, Skype, software as a service, The Chicago School, Turing test, Watson beat the top human players on Jeopardy!, winner-take-all economy, women in the workforce, working poor, Works Progress Administration

As momentum built, and other programs automatically executed “stop-loss” orders to sell at any price, the denominator of that percentage grew and grew. But that’s only the start of the story. Safety alarms, responsibly incorporated into HFT programs all over the world, went off. Detecting unusual market fluctuations, some began dutifully unwinding positions at a furious pace to protect their patron’s money. It was a full-on instant electronic bank run. The more aggressive ones, sensing a rare opportunity, smelled blood in the water. Interpreting the frantic buying and selling of their electronic counterparts as prey on the run, they traded furiously on their proprietary algorithms’ predictions that the generous spreads would quickly evaporate. Due to the unprecedented volume of transactions, reporting systems fell behind, injecting false information into this pileup.

 

pages: 233 words: 66,446

Bitcoin: The Future of Money? by Dominic Frisby

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3D printing, altcoin, bank run, banking crisis, banks create money, barriers to entry, bitcoin, blockchain, capital controls, Chelsea Manning, cloud computing, computer age, cryptocurrency, disintermediation, ethereum blockchain, fiat currency, friendly fire, game design, Isaac Newton, Julian Assange, litecoin, M-Pesa, mobile money, money: store of value / unit of account / medium of exchange, Occupy movement, Peter Thiel, Ponzi scheme, prediction markets, price stability, quantitative easing, railway mania, Ronald Reagan, Satoshi Nakamoto, Silicon Valley, Skype, slashdot, smart contracts, Snapchat, Stephen Hawking, Steve Jobs, Ted Nelson, too big to fail, transaction costs, Turing complete, War on Poverty, web application, WikiLeaks

To get the balance right, I have had it read, at one end of the scale, by numerous computer programmers and, at the other, by my 82-year-old, technologically illiterate dad. I hope you enjoy it. Prologue We have not only saved the world, er, saved the banks… Gordon Brown, former UK Prime Minister In September 2008, crisis gripped the world. Many believed the entire financial system was about to collapse. It was a ‘global financial tsunami’; we were ‘on the brink’ and ‘staring into the abyss’.1 Capitulating stock markets, bankruptcies, bank runs – events came thick and fast and, at first, nobody seemed to know quite what to do. Then, under immense pressure from the world of finance, governments and central banks reacted dramatically. They created money and credit on a scale unprecedented in human history. Banks were bailed out, interest rates were slashed to levels never seen before and the process of creating money electronically known as quantitative easing was begun.

 

pages: 318 words: 77,223

The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse by Mohamed A. El-Erian

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Airbnb, balance sheet recession, bank run, barriers to entry, Bretton Woods, British Empire, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, collapse of Lehman Brothers, corporate governance, currency peg, Erik Brynjolfsson, eurozone crisis, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, Flash crash, forward guidance, friendly fire, full employment, future of work, Hyman Minsky, If something cannot go on forever, it will stop, income inequality, inflation targeting, Jeff Bezos, Kenneth Rogoff, Khan Academy, liquidity trap, Martin Wolf, megacity, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, oil shale / tar sands, price stability, principal–agent problem, quantitative easing, risk tolerance, risk-adjusted returns, risk/return, Second Machine Age, secular stagnation, sharing economy, sovereign wealth fund, The Great Moderation, The Wisdom of Crowds, too big to fail, University of East Anglia, yield curve

The problem is that none of them took the type of decisive policy actions needed. To make things worse, each side had difficulties convincing the other of its seriousness. As such, the risk of a Graccident rose considerably, culminating in an economic “sudden stop” in June–July 2015—one in which a total breakdown in negotiations, amplified by acrimonious accusations and bitter personal attacks, led to a bank run that forced the disorderly closure of the banking system. Together with capital controls aimed at keeping whatever euros were left within Greece, the result was a collapse in economic activity, trade, and trust in the system. Even tourism, a key sector for Greece, was disrupted. The already alarming levels of unemployment headed even higher, already strained social safety nets were stretched even more, and poverty deepened and spread.

 

pages: 257 words: 71,686

Swimming With Sharks: My Journey into the World of the Bankers by Joris Luyendijk

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bank run, barriers to entry, Bonfire of the Vanities, bonus culture, collapse of Lehman Brothers, collective bargaining, credit crunch, Credit Default Swap, Emanuel Derman, financial deregulation, financial independence, Flash crash, glass ceiling, Gordon Gekko, high net worth, hiring and firing, inventory management, job-hopping, London Whale, Nick Leeson, offshore financial centre, regulatory arbitrage, shareholder value, sovereign wealth fund, the payments system, too big to fail

This is not because repairs take long. Finding out what the problem is in the first place – “root cause analysis” – that’s nearly always the most time-consuming. Nobody has a complete and in-depth overview.’ He seemed genuinely concerned that one day a megabank would be shut out of its own data. What happens to the companies who rely on that bank’s payment system? ‘It would make the panic during a bank run look innocent.’ He spoke of colleagues who retain paper copies of all their internet banking statements and confirmed with a grin a favourite quote of mine from another IT specialist I’d interviewed: ‘The generation who built the computer systems when automation took off is now reaching retirement age. So there we are, called into a bank to solve a problem. They take us to a greying man sitting in the corner: “Please meet Peter, he is the only one left around here who still understands the systems.”’

 

pages: 268 words: 74,724

Who Needs the Fed?: What Taylor Swift, Uber, and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank by John Tamny

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Airbnb, bank run, banks create money, Bernie Madoff, bitcoin, Bretton Woods, Carmen Reinhart, correlation does not imply causation, Credit Default Swap, crony capitalism, crowdsourcing, Donald Trump, Downton Abbey, fiat currency, financial innovation, Fractional reserve banking, full employment, George Gilder, Home mortgage interest deduction, Jeff Bezos, job automation, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, liquidity trap, Mark Zuckerberg, market bubble, moral hazard, mortgage tax deduction, NetJets, offshore financial centre, oil shock, peak oil, Peter Thiel, price stability, profit motive, quantitative easing, race to the bottom, Ronald Reagan, self-driving car, sharing economy, Silicon Valley, Silicon Valley startup, Steve Jobs, The Wealth of Nations by Adam Smith, too big to fail, Uber for X, War on Poverty, yield curve

In this case, rather than keeping a greater percentage of customer deposits on hand, banks would issue more shares in order to raise money. Notable here is that they wouldn’t use the funds to expand their footprint, acquire talent and/or competitors, or enhance the customer experience; instead the funds raised would be invested in highly liquid, largely risk-free securities (think U.S. Treasuries) so that the money could be accessed amid a “crisis” or “bank run.” Banks would have a “cushion.” The problems with this idea are many, however. For one, the capital raise would dilute existing shareholders owing to the issuance of new shares, all the while doing nothing to enhance the bank itself. Remember, capital would be raised solely as a cushion to be accessed in an emergency when credit is “tight.” Similarly, with shareholders in mind, capital is expensive.

 

pages: 251 words: 76,868

How to Run the World: Charting a Course to the Next Renaissance by Parag Khanna

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Albert Einstein, Asian financial crisis, back-to-the-land, bank run, blood diamonds, borderless world, BRICs, British Empire, call centre, carbon footprint, charter city, clean water, cleantech, cloud computing, corporate governance, corporate social responsibility, Deng Xiaoping, Doha Development Round, don't be evil, double entry bookkeeping, energy security, European colonialism, facts on the ground, failed state, friendly fire, global village, Google Earth, high net worth, index fund, informal economy, invisible hand, labour mobility, laissez-faire capitalism, Masdar, megacity, microcredit, mutually assured destruction, Naomi Klein, New Urbanism, offshore financial centre, oil shock, open economy, out of africa, private military company, Productivity paradox, race to the bottom, RAND corporation, reserve currency, Silicon Valley, smart grid, South China Sea, sovereign wealth fund, special economic zone, sustainable-tourism, The Fortune at the Bottom of the Pyramid, The Wisdom of Crowds, too big to fail, trade liberalization, trickle-down economics, UNCLOS, uranium enrichment, Washington Consensus, X Prize

The Philippines, South Africa, and other countries have become the world’s liveliest laboratories for the interplay of remittances, micro-credit, FDI, bilateral donors, and new public-private partnerships—with results tracked and measured on websites such as AidData.org. Stories of success inspire replication and scale. Small models that work are far more useful than failed big ones. In Nepal, the Asian Development Bank runs a performance-based grant system: Local constituencies that spend money wisely get more as a reward. Members of the public are informed about which districts are getting what resources, so they have started to lobby hard for better local governance. This is a good model for better global governance as well. Caring for Orphans There are certainly countries in the world—dozens of them—where aid still makes the difference between life and death.

 

pages: 1,335 words: 336,772

The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance by Ron Chernow

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bank run, banking crisis, Big bang: deregulation of the City of London, Bolshevik threat, Boycotts of Israel, Bretton Woods, British Empire, California gold rush, capital controls, collective bargaining, Etonian, financial deregulation, German hyperinflation, index arbitrage, interest rate swap, margin call, Monroe Doctrine, North Sea oil, oil shale / tar sands, paper trading, Plutocrats, plutocrats, Robert Gordon, Ronald Reagan, short selling, strikebreaker, the market place, the payments system, too big to fail, transcontinental railway, Yom Kippur War, young professional

They would finally take their name from a new subcommittee counsel, Ferdinand Pecora, appointed in January 1933. The Pecora hearings would lead straight to Glass-Steagall and the dismemberment of the House of Morgan. IN the autumn of 1932, Hoover presided over one last humiliation—a nationwide banking crisis. Three years of deflation had eroded the collateral behind many loans. As banks called them in, the business slump worsened and produced more bank runs and failures. Before 1932, the thousands of bank closings were mostly confined to small rural banks. Then, that October, Nevada’s governor shut the state’s banks. There followed a frightening crescendo of state bank closings—euphemistically called holidays—climaxed by an eight-day closing of Michigan banks in February. The contagion spread so fast that thirty-eight states had shut their banks by Roosevelt’s inauguration.

The Arab oil embargo and consequent jump in world oil prices produced inflation and skidding financial markets. With an end to fixed exchange rates in the early 1970s, foreign-exchange trading became a wild poker game. In November 1973, Morgan president Walter Hines Page warned friends at Franklin National Bank against excessive foreign-exchange gambling and quietly alerted the New York Fed to the problem. In May 1974, Franklin’s foreign-exchange losses led to the first major bank run since the Depression and the biggest bank failure in U.S. history. When Bankhaus Herstatt, West Germany’s biggest private bank, mysteriously failed in June, it saddled Morgan Guaranty with a $13-million loss. That fall, Fortune warned, “The nation’s financial system is facing its gravest crisis since the Bank Holiday of 1933. The crisis is one of confidence. The public has become increasingly worried about the solvency of even the most profitable banks.”1 With this thick pall hanging over the banking world, the banks were suddenly tempted by Arab petrodollars.

To reassure institutions holding its paper, Continental began to pay higher rates on its CDs. When domestic money managers balked, the bank relied more on Japanese and European funds and sent its financial evangelists abroad to preach calm. “We had the Continental Illinois Reassurance Brigade and we fanned out all around the world,” said David Taylor, Continental’s chairman in 1984.11 The bank never fully recuperated from Penn Square, which led to the first global electronic bank run in May 1984. It began with a fugitive rumor floating around Tokyo that an American investment bank was shopping Continental to possible buyers. This triggered the sale of up to $1 billion in Continental CDs in the Far East, spilling over into panicky European selling the next day. The Continental run was like some modernistic fantasy: there were no throngs of hysterical depositors, just cool nightmare flashes on computer screens.

 

pages: 662 words: 180,546

Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown by Philip Mirowski

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Andrei Shleifer, asset-backed security, bank run, barriers to entry, Basel III, Berlin Wall, Bernie Madoff, Bernie Sanders, Black Swan, blue-collar work, Bretton Woods, Brownian motion, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, constrained optimization, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, dark matter, David Brooks, David Graeber, debt deflation, deindustrialization, Edward Glaeser, Eugene Fama: efficient market hypothesis, experimental economics, facts on the ground, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, full employment, George Akerlof, Goldman Sachs: Vampire Squid, Hernando de Soto, housing crisis, Hyman Minsky, illegal immigration, income inequality, incomplete markets, invisible hand, Jean Tirole, joint-stock company, Kenneth Rogoff, knowledge economy, l'esprit de l'escalier, labor-force participation, liquidity trap, loose coupling, manufacturing employment, market clearing, market design, market fundamentalism, Martin Wolf, Mont Pelerin Society, moral hazard, mortgage debt, Naomi Klein, Nash equilibrium, night-watchman state, Northern Rock, Occupy movement, offshore financial centre, oil shock, payday loans, Ponzi scheme, precariat, prediction markets, price mechanism, profit motive, quantitative easing, race to the bottom, random walk, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, school choice, sealed-bid auction, Silicon Valley, South Sea Bubble, Steven Levy, technoutopianism, The Chicago School, The Great Moderation, the map is not the territory, The Myth of the Rational Market, the scientific method, The Wisdom of Crowds, theory of mind, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, War on Poverty, Washington Consensus, We are the 99%, working poor

In the rush to judgment, anyone who said or wrote anything about some kind of bubble or imbalance or financial instability sometime in the 2000s suddenly sought to be credited as rivaling the Oracle at Delphi, engaging in the most exquisite augury. Some Nobel winners in particular pushed this ploy well beyond the breaking point, eliding prediction proper, and instead suggesting that anyone who had ever produced a mathematical model mentioning bank runs or financial fraud or irrational expectations or debt deflation or (fill in the blank) was proof positive that the economics profession had not been caught unawares.23 It helped if the interlocutor stopped paying attention to what had been taught in the macroeconomics classes across the most highly ranked economics departments. It got so bad after a while that any mention of market failure or departure from equilibrium was supposed to function as a “get out of jail free” card in 2009.

The Economist’s Oath (New York: Oxford University Press, 2011). Denord, Francois. Néo-Libéralisme version francais (Paris: Demopolis, 2007). De Soto, Hernando. “The Destruction of Economic Facts,” Business Week, April 28, 2011. Deuber-Mankowsky, Astrid. “Nothing Is Political, Everything Can Be Politicized: On the Concept of the Political in Michel Foucault and Carl Schmitt,” Telos 142 (2008): 135–61. Diamond, Douglas, and Philip Dybvig. “Bank Runs, Deposit Insurance and Liquidity,” Journal of Political Economy 91 (1983): 401–19. Diamond, Marie. “The Return of Debtor’s Prisons” (2011), at http://thinkprogress.org/justice/2011/12/13/388303/the-return-of-debtors-prisons-thousands-of-americans-jailed-for-not-paying-their-bills/. Diamond, Sara. Not by Politics Alone (New York: Guilford Press, 1998). Diamond, Sara. Roads to Dominion (New York: Guilford Press, 1995).

 

pages: 397 words: 112,034

What's Next?: Unconventional Wisdom on the Future of the World Economy by David Hale, Lyric Hughes Hale

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affirmative action, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Berlin Wall, Black Swan, Bretton Woods, capital controls, Cass Sunstein, central bank independence, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, debt deflation, declining real wages, deindustrialization, diversification, energy security, Erik Brynjolfsson, Fall of the Berlin Wall, financial innovation, floating exchange rates, full employment, Gini coefficient, global reserve currency, global village, high net worth, Home mortgage interest deduction, housing crisis, index fund, inflation targeting, invisible hand, Just-in-time delivery, Kenneth Rogoff, labour market flexibility, labour mobility, Long Term Capital Management, Mahatma Gandhi, Martin Wolf, Mexican peso crisis / tequila crisis, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, mortgage tax deduction, Network effects, new economy, Nicholas Carr, oil shale / tar sands, oil shock, open economy, passive investing, payday loans, peak oil, Ponzi scheme, post-oil, price stability, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, sovereign wealth fund, special drawing rights, technology bubble, The Great Moderation, Thomas Kuhn: the structure of scientific revolutions, Tobin tax, too big to fail, total factor productivity, trade liberalization, Washington Consensus, women in the workforce, yield curve

The temporary arrangements that were cobbled together for Greece in May 2010 were replaced with a permanent mechanism of collective responsibility for European sovereign and bank debts: In other words, the EU must take a decisive step towards fiscal federalism. This was always the main condition for a credible single currency. 2. No burden-sharing for any senior bank creditors, so as to avoid triggering Lehman-style bank runs across the eurozone: According to the news reports and briefings from Brussels and Dublin, these seemed to have been confirmed in the Irish bailout. But the language of the Irish program was rather ambiguous, and contained ominous warnings for owners of bank bonds. 3. No haircuts or burden-sharing on any sovereign debts currently outstanding: This seemed to have been promised by only applying the proposed Collective Action Clauses (CACs) to new debts that are issued after mid-2013. 4.

 

pages: 350 words: 103,270

The Devil's Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street . . . And Are Ready to Do It Again by Nicholas Dunbar

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asset-backed security, bank run, banking crisis, Basel III, Black Swan, Black-Scholes formula, bonus culture, capital asset pricing model, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, delayed gratification, diversification, Edmond Halley, facts on the ground, financial innovation, fixed income, George Akerlof, implied volatility, index fund, interest rate derivative, interest rate swap, Isaac Newton, Kenneth Rogoff, Long Term Capital Management, margin call, market bubble, Nick Leeson, Northern Rock, offshore financial centre, price mechanism, regulatory arbitrage, rent-seeking, Richard Thaler, risk tolerance, risk/return, Ronald Reagan, shareholder value, short selling, statistical model, The Chicago School, time value of money, too big to fail, transaction costs, value at risk, Vanguard fund, yield curve

How do banks get away with taking depositors’ cash and lending it out to borrowers who won’t pay the money back for years? Like the Cowardly Lion, the Scarecrow, and the Tin Man getting green spectacles from the Wizard of Oz, the depositors happily walk around thinking their cash is available whenever they want it. Woe betide any bank whose depositors take their green spectacles off. The need to keep the illusion intact (and to save the economy from bank runs) was the driver behind the invention of central banking and deposit insurance. But what happens if you dispense with banks, and central banks as well? What happens if an unregulated free market creates a parallel system that connects depositors with CDOs, subprime mortgage bonds, and a web of derivatives? The answer emerged in the summer of 2007, when people like Mike Smith discovered that the assurance of liquidity—the ultimate basis of banking confidence—had been subverted into the ultimate depository of concealed risk.

 

pages: 326 words: 93,522

Underground, Overground by Andrew Martin

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bank run, congestion charging, garden city movement, Plutocrats, plutocrats, traveling salesman, V2 rocket

For example, you could try going the opposite way to everyone else. In other words, Bank to Waterloo in the morning peak, Waterloo to Bank in the evening. (Or, when everyone gets off the train at Bank, you could stay on, and go back to Waterloo.) It might be an idea to set yourself up with a flat near Bank and a job near Waterloo. You would more or less always have the train to yourself. But be warned, both sides of the Trav-o-lator, or moving walkway, at Bank run in the same direction – out of the station and into the street – in the morning peak. So if you were so mad as to want to descend towards – as opposed to ascend from – the Waterloo & City platforms at Bank in the morning, you would have to use the long slope. I once asked a ticket platform guard at Bank why both tracks of the Travel-o-lator didn’t run towards the Drain platforms in the evening peak (because they don’t; they run alternately then).

 

pages: 411 words: 108,119

The Irrational Economist: Making Decisions in a Dangerous World by Erwann Michel-Kerjan, Paul Slovic

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Andrei Shleifer, availability heuristic, bank run, Black Swan, Cass Sunstein, clean water, cognitive dissonance, collateralized debt obligation, complexity theory, conceptual framework, corporate social responsibility, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-subsidies, Daniel Kahneman / Amos Tversky, endowment effect, experimental economics, financial innovation, Fractional reserve banking, George Akerlof, hindsight bias, incomplete markets, invisible hand, Isaac Newton, iterative process, Loma Prieta earthquake, London Interbank Offered Rate, market bubble, market clearing, moral hazard, mortgage debt, placebo effect, price discrimination, price stability, RAND corporation, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, statistical model, stochastic process, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transaction costs, ultimatum game, University of East Anglia, urban planning

The likelihood of a given dollar amount of hurricane damage is much more objective and transparent than the likelihood of a deep recession, or, more accurately, of AAA securities trading at only pennies on the dollar. We can objectively simulate storm frequency, severity, and trajectory based on our knowledge of physical systems. We cannot objectively simulate the “madness of crowds”—by which I mean shifts in sentiment, so-called animal spirits, or runs on banks, runs on markets, or runs on consumption. Finally, cat risk is not systematic—it is not correlated with the risks of major financial markets. This means that we have a good idea of what the “fair market” price of cat risk should be. Specifically, because cat risk is diversifiable, the fair-value premium for a reinsurance contract that incurs no losses 99 percent of the time and incurs losses up to a given limit 1 percent of the time is 1 percent.

 

pages: 523 words: 111,615

The Economics of Enough: How to Run the Economy as if the Future Matters by Diane Coyle

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accounting loophole / creative accounting, affirmative action, bank run, banking crisis, Berlin Wall, bonus culture, Branko Milanovic, BRICs, call centre, Cass Sunstein, central bank independence, collapse of Lehman Brothers, conceptual framework, corporate governance, correlation does not imply causation, Credit Default Swap, deindustrialization, demographic transition, Diane Coyle, disintermediation, Edward Glaeser, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, Financial Instability Hypothesis, Francis Fukuyama: the end of history, George Akerlof, Gini coefficient, global supply chain, Gordon Gekko, greed is good, happiness index / gross national happiness, Hyman Minsky, If something cannot go on forever, it will stop, illegal immigration, income inequality, income per capita, invisible hand, Jane Jacobs, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour market flexibility, low skilled workers, market bubble, market design, market fundamentalism, megacity, Network effects, new economy, night-watchman state, Northern Rock, oil shock, principal–agent problem, profit motive, purchasing power parity, railway mania, rising living standards, Ronald Reagan, Silicon Valley, South Sea Bubble, Steven Pinker, The Design of Experiments, The Fortune at the Bottom of the Pyramid, The Market for Lemons, The Myth of the Rational Market, The Spirit Level, transaction costs, transfer pricing, tulip mania, ultimatum game, University of East Anglia, web application, web of trust, winner-take-all economy, World Values Survey

. ∞ Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 CONTENTS Overview PART ONE: CHALLENGES ONE Happiness TWO Nature THREE Posterity FOUR Fairness FIVE Trust PART TWO: OBSTACLES SIX Measurement SEVEN Values EIGHT Institutions PART THREE: MANIFESTO NINE The Manifesto of Enough Acknowledgments Notes References Illustration Credits Index The Economics of Enough OVERVIEW In mid-september 2007 my sister phoned me to ask whether she should withdraw her savings from the bank and put the money somewhere else—and if so, where would be safe. She was with Northern Rock, and there was an old-fashioned run on the bank. It was unable to meet customers’ demand for withdrawals and had to ask the Bank of England to lend it the cash. The television news showed lines of anxious depositors hoping to take out all their funds. It was the first full-fledged bank run in living memory in the United Kingdom. I told her that the government would bail out all the depositors, as it would be political suicide to do anything else. My sister ignored my advice (although it ultimately turned out to be right) and joined the line outside her local branch. As for Northern Rock, it had to be taken over by the British government. A year later, in September 2008, the investment bank Lehman Brothers collapsed.

 

pages: 369 words: 94,588

The Enigma of Capital: And the Crises of Capitalism by David Harvey

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accounting loophole / creative accounting, anti-communist, Asian financial crisis, bank run, banking crisis, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business climate, call centre, capital controls, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, deskilling, equal pay for equal work, European colonialism, failed state, financial innovation, Frank Gehry, full employment, global reserve currency, Google Earth, Guggenheim Bilbao, illegal immigration, indoor plumbing, interest rate swap, invention of the steam engine, Jane Jacobs, joint-stock company, Joseph Schumpeter, Just-in-time delivery, land reform, liquidity trap, Long Term Capital Management, market bubble, means of production, megacity, microcredit, moral hazard, mortgage debt, new economy, New Urbanism, Northern Rock, oil shale / tar sands, peak oil, place-making, Ponzi scheme, precariat, reserve currency, Ronald Reagan, sharing economy, Silicon Valley, special drawing rights, special economic zone, statistical arbitrage, structural adjustment programs, the built environment, the market place, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, Thorstein Veblen, too big to fail, trickle-down economics, urban renewal, urban sprawl, white flight, women in the workforce

The turn to financialisation since 1973 was one born of necessity. It offered a way of dealing with the surplus absorption problem. But where was the surplus cash, the surplus liquidity, to come from? By the 1990s the answer was clear: increased leverage. Banks typically lend, say, three times the value of their deposits on the theory that depositors will never all cash out at the same time. When a bank run does occur the bank will almost certainly have to close its doors because it will never have enough cash in hand to cover its obligations. From the 1990s on, the banks upped this debt–deposit ratio, often lending to each other. Banking became more indebted than any other sector of the economy. By 2005 the leveraging ratio went as high as 30 to 1. No wonder the world appeared to be awash with surplus liquidity.

 

pages: 357 words: 99,684

Why It's Still Kicking Off Everywhere: The New Global Revolutions by Paul Mason

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back-to-the-land, balance sheet recession, bank run, banking crisis, Berlin Wall, capital controls, centre right, citizen journalism, collapse of Lehman Brothers, collective bargaining, credit crunch, Credit Default Swap, currency manipulation / currency intervention, currency peg, eurozone crisis, Fall of the Berlin Wall, floating exchange rates, Francis Fukuyama: the end of history, full employment, ghettoisation, illegal immigration, informal economy, land tenure, low skilled workers, means of production, megacity, Mohammed Bouazizi, Naomi Klein, Network effects, New Journalism, Occupy movement, price stability, quantitative easing, race to the bottom, rising living standards, short selling, Slavoj Žižek, Stewart Brand, strikebreaker, union organizing, We are the 99%, Whole Earth Catalog, WikiLeaks, Winter of Discontent, women in the workforce, working poor, working-age population, young professional

There is a ‘heroic’ period of globalization, beginning in 1989 and ending around 1999, during which China’s entry into the world market helps suppress inflation; where falling wages are offset by a seemingly sustainable expansion of credit; where house prices rise, allowing the credit to be paid off and a whole bunch of innovations are suddenly deployed—above all mobile telephony and broadband Internet. Then there is a second phase in which the disruption overwhelms the innovations: China’s increased consumption of raw materials creates world-wide inflationary pressure; the house-price boom ends, because the banks run out of poverty-stricken workers to lend to; mass migration begins to exert a downward pressure on the wages of unskilled workers in Europe and the USA; the financial dynamic overtakes, dominates and ultimately chokes off the dynamics of production, trade and innovation. The rise of finance, wage stagnation, the capture of regulation and politics by a financial elite, consumption fuelled by credit rather than wages: it all blew up spectacularly.

 

pages: 402 words: 98,760

Deep Sea and Foreign Going by Rose George

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Admiral Zheng, air freight, Albert Einstein, bank run, cable laying ship, Captain Sullenberger Hudson, Costa Concordia, Edward Lloyd's coffeehouse, Exxon Valdez, failed state, Filipino sailors, global supply chain, Google Earth, intermodal, London Whale, Malacca Straits, Panamax, pattern recognition, profit maximization, Skype, trade route, UNCLOS, UNCLOS, urban planning

The canal takes 14 hours to transit and has existed in some form ever since Pharaoh Senusret III, ruler in 1874 BC, chopped through the land mass to make a passage between open seas. It was built by Egyptian labourers working to the design of the French engineer Ferdinand de Lesseps; 20,000 new workers had to be drafted in every 10 months, according to the official Suez canal website, ‘from the ranks of peasantry’. Alongside its banks runs a railway and a ‘sweet water canal’. I write in my notebook that somewhere nearby there is a vegetable oil pipeline marked on a chart, but I never find it again. The Suez Canal took 10 years to construct, is 100 miles long, and earns the Egyptian government £3 billion a year. Right, say the crew. But it’s still just a ditch in a desert. Even the laconic Vinton finds something to say about it, although the something is not much.

 

pages: 356 words: 103,944

The Globalization Paradox: Democracy and the Future of the World Economy by Dani Rodrik

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affirmative action, Asian financial crisis, bank run, banking crisis, bilateral investment treaty, borderless world, Bretton Woods, British Empire, capital controls, Carmen Reinhart, central bank independence, collective bargaining, colonial rule, Corn Laws, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, Doha Development Round, en.wikipedia.org, eurozone crisis, financial deregulation, financial innovation, floating exchange rates, frictionless, frictionless market, full employment, George Akerlof, guest worker program, Hernando de Soto, immigration reform, income inequality, income per capita, joint-stock company, Kenneth Rogoff, labour market flexibility, labour mobility, land reform, Long Term Capital Management, low skilled workers, margin call, market bubble, market fundamentalism, Martin Wolf, Mexican peso crisis / tequila crisis, microcredit, Monroe Doctrine, moral hazard, night-watchman state, non-tariff barriers, offshore financial centre, oil shock, open borders, open economy, price stability, profit maximization, race to the bottom, regulatory arbitrage, savings glut, Silicon Valley, special drawing rights, special economic zone, The Wealth of Nations by Adam Smith, Thomas L Friedman, Tobin tax, too big to fail, trade liberalization, trade route, transaction costs, tulip mania, Washington Consensus, World Values Survey

A bank may face a run for no good reason other than public fear that it will face a run. Modern economies have invented powerful tools against this pathology. Their central banks act as lenders-of-last-resort, providing the liquidity needed to stabilize troubled banks and stem potential panic. In addition, bank deposits are insured up to certain limits in most countries. Thanks to these governmental safeguards, conventional bank runs have become a thing of the past. Except in international finance. The countries of East Asia had been doing just what traditional commercial banks do. They borrowed short term in international financial markets to finance domestic investments. (Short-term debt was preferred both because it was cheaper and because prevailing capital-adequacy standards required lenders to set aside less capital when they were extending short-term loans.)

 

pages: 398 words: 108,889

The Paypal Wars: Battles With Ebay, the Media, the Mafia, and the Rest of Planet Earth by Eric M. Jackson

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bank run, business process, call centre, disintermediation, Elon Musk, index fund, Internet Archive, iterative process, Joseph Schumpeter, market design, Menlo Park, moral hazard, Network effects, new economy, offshore financial centre, Peter Thiel, Sand Hill Road, shareholder value, Silicon Valley, Silicon Valley startup, telemarketer, The Chicago School, Turing test

Foreign bondholders grew nervous as the economic minister seized control of the central bank and raised the specter of devaluing the peso as a cheap way to pay off Argentina’s mounting debts. During the second half of 2001, Argentina’s citizens acted on these fears by emptying their bank accounts and converting their pesos into dollars. Instead of making the difficult choices needed to address the underlying economic problems, the government tried to put a stop to the bank run with a 1,000 pesos-per-month limit on withdrawals. Argentines took to the streets in protest, prompting a stream of officials, including the president, to resign. But the withdrawal limit remained in place, and at the beginning of 2002 the government ended the peso’s peg to the dollar and defaulted on its debt. Over the next three months the peso fell 70% against the dollar while prices soared by 20%, eroding the purchasing power of the money frozen inside bank accounts.7 Rather than cutting spending or liberalizing its trade policies, Argentina’s government addressed its debt liquidity crisis by eviscerating the savings of its own people.

 

pages: 323 words: 95,939

Present Shock: When Everything Happens Now by Douglas Rushkoff

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algorithmic trading, Andrew Keen, bank run, Benoit Mandelbrot, big-box store, Black Swan, British Empire, Buckminster Fuller, cashless society, citizen journalism, clockwork universe, cognitive dissonance, Credit Default Swap, crowdsourcing, Danny Hillis, disintermediation, Donald Trump, double helix, East Village, Elliott wave, European colonialism, Extropian, facts on the ground, Flash crash, game design, global supply chain, global village, Howard Rheingold, hypertext link, Inbox Zero, invention of agriculture, invention of hypertext, invisible hand, iterative process, John Nash: game theory, Kevin Kelly, laissez-faire capitalism, Law of Accelerating Returns, loss aversion, mandelbrot fractal, Marshall McLuhan, Merlin Mann, Milgram experiment, mutually assured destruction, Network effects, New Urbanism, Nicholas Carr, Norbert Wiener, Occupy movement, passive investing, pattern recognition, peak oil, price mechanism, prisoner's dilemma, Ralph Nelson Elliott, RAND corporation, Ray Kurzweil, recommendation engine, Silicon Valley, Skype, social graph, South Sea Bubble, Steve Jobs, Steve Wozniak, Steven Pinker, Stewart Brand, supply-chain management, the medium is the message, The Wisdom of Crowds, theory of mind, Turing test, upwardly mobile, Whole Earth Catalog, WikiLeaks, Y2K

The impatient rush to judgment of the Tea Party movement is only as unnerving as the perpetually patient deliberation of its counterpart present shock movement, Occupy Wall Street. Opposite reactions to collapse of political narrative, the Tea Party yearns for finality while the Occupy movement attempts to sustain indeterminacy. Inspired by the social-media-influenced revolutions of the Arab Spring, Occupy Wall Street began as a one-day campaign to call attention to the inequities inherent in a bank-run, quarterly-focused, debt-driven economy. It morphed into something of a permanent revolution, however, dedicated to producing new models of political and economic activity by its very example. Tea Partiers mean to wipe out the chaotic confusion of a world without definitive stories; the Occupiers mean to embed themselves within it so that new forms may emerge. It’s not an easy sell. The Tea Party’s high-profile candidates and caustic rhetoric are as perfectly matched for the quick-cut and argument-driven programming of the cable news networks as the Occupiers are incompatible.

 

pages: 379 words: 108,129

An Optimist's Tour of the Future by Mark Stevenson

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23andMe, Albert Einstein, Andy Kessler, augmented reality, bank run, carbon footprint, carbon-based life, clean water, computer age, decarbonisation, double helix, Douglas Hofstadter, Elon Musk, flex fuel, Gödel, Escher, Bach, Hans Rosling, Internet of things, invention of agriculture, Isaac Newton, Jeff Bezos, Kevin Kelly, Law of Accelerating Returns, life extension, Louis Pasteur, mutually assured destruction, Naomi Klein, packet switching, peak oil, pre–internet, Ray Kurzweil, Richard Feynman, Richard Feynman, Rodney Brooks, self-driving car, Silicon Valley, smart cities, stem cell, Stephen Hawking, Steven Pinker, Stewart Brand, strong AI, the scientific method, Wall-E, X Prize

Klaus’s requirements amount to just 0.000025 per cent of the $787 billion the US government pulled out of the hat for its American Recovery and Reinvestment Act of 2009 – money for stimulating the economy out of the economic crisis. One quarter of one ten-thousandth of a per cent. It’s ironic that when it came to saving the financial system, governments around the world couldn’t move fast enough. Yet there is another platform all the banks run on. It’s called the atmosphere, and the social and financial implications of global warming will do more to hamper Wall Street than anything they’ve done to themselves. When, I wonder, did a human-friendly atmosphere not become an infrastructural investment? A back of a napkin calculation suggests we could build enough scrubbers to reclaim all the carbon we pump into the atmosphere each year (and start to reclaim the backlog) for the equivalent of a three per cent tax on car prices for the next ten years.

 

pages: 391 words: 99,963

The Weather of the Future by Heidi Cullen

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2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, air freight, American Society of Civil Engineers: Report Card, availability heuristic, back-to-the-land, bank run, California gold rush, carbon footprint, clean water, colonial rule, energy security, illegal immigration, Isaac Newton, megacity, millennium bug, out of africa, Silicon Valley, smart cities, trade route, urban planning, Y2K

I was standing on the corner of Fifty-Ninth Street and Columbus Avenue, freezing cold but happy to have company. My roommate had decided, uncharacteristically, that she was going to Times Square with some friends, and so I tagged along not wanting to be home alone in the apartment. It was almost midnight, so Fifty-Ninth Street was as close as we could get to Times Square. Despite frigid temperatures and months of media hype with dire predictions of power outages, bank runs, and other random catastrophes, there we all were. Hundreds of thousands of people from all over the world, ready to hug a stranger and ring in the New Year. As always, there was a sense that the New Year—in this case, it was also celebrated as the start of a new millennium—held the possibility of something better. And as far as I could tell, the competing sense that we might also witness human civilization crushed by a little bug was not lost on anyone.

 

pages: 357 words: 110,017

Money: The Unauthorized Biography by Felix Martin

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bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, British Empire, call centre, capital asset pricing model, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, credit crunch, David Graeber, en.wikipedia.org, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, Fractional reserve banking, full employment, Goldman Sachs: Vampire Squid, Hyman Minsky, inflation targeting, invention of writing, invisible hand, Irish bank strikes, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, mobile money, moral hazard, mortgage debt, new economy, Northern Rock, Occupy movement, Plutocrats, plutocrats, private military company, Republic of Letters, Richard Feynman, Richard Feynman, Robert Shiller, Robert Shiller, Scientific racism, seigniorage, Silicon Valley, smart transportation, South Sea Bubble, supply-chain management, The Wealth of Nations by Adam Smith, too big to fail

The discussion in which Wolf and Summers made these comments is available at: http://​ineteconomics.​org/​net/​video/​playlist/​conference/​bretton-​woods/​V. Summers’ response referred to here is his answer to the first question in the interview, starting at 6:04. 8. Ibid. Summers also mentioned the 1981 Nobel Laureate James Tobin as an important influence, as well as alluding to the microeconomic literature on bank runs. 9. Ibid., second question starting at 10:58. 10. Ibid. 11. It was the short-lived but highly influential economic historian Arnold Toynbee who seems to have coined the name in lectures that he delivered at Oxford in the late 1870s which were published after his death in 1883 as The Industrial Revolution. 12. There were fewer than 70,000 Friends even at the height of Quakerism’s popularity in the late seventeenth century, and little more than 20,000 by the early nineteenth.

 

pages: 309 words: 95,495

Foolproof: Why Safety Can Be Dangerous and How Danger Makes Us Safe by Greg Ip

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Affordable Care Act / Obamacare, Air France Flight 447, air freight, airport security, Asian financial crisis, asset-backed security, bank run, banking crisis, Bretton Woods, capital controls, central bank independence, cloud computing, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, Daniel Kahneman / Amos Tversky, diversified portfolio, double helix, endowment effect, Exxon Valdez, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, global supply chain, hindsight bias, Hyman Minsky, Joseph Schumpeter, Kenneth Rogoff, London Whale, Long Term Capital Management, market bubble, moral hazard, Network effects, new economy, offshore financial centre, paradox of thrift, pets.com, Ponzi scheme, quantitative easing, Ralph Nader, Richard Thaler, risk tolerance, Ronald Reagan, savings glut, technology bubble, The Great Moderation, too big to fail, transaction costs, union organizing, Unsafe at Any Speed, value at risk

“Financial systems enable the mediation of capital between those who have put aside something for consumption in the future and people who have a productive use of those resources,” Summers explained. “Those principles apply between individuals, companies, and countries. Sometimes, countries have difficulty paying the money back, and it becomes a panic, just like the game we played describing a bank run. Everyone wants to take their money out at once, and everybody can’t take their money out at once. So there is a need to provide confidence.” Confidence is central to Summers’s thinking about crises. We regard confidence as good and moral hazard as bad, but, he likes to note, they are two sides of the same coin. Moral hazard means encouraging us to take risks by protecting us from their consequences.

 

pages: 368 words: 32,950

How the City Really Works: The Definitive Guide to Money and Investing in London's Square Mile by Alexander Davidson

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accounting loophole / creative accounting, algorithmic trading, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, Big bang: deregulation of the City of London, capital asset pricing model, central bank independence, corporate governance, Credit Default Swap, dematerialisation, discounted cash flows, diversified portfolio, double entry bookkeeping, Edward Lloyd's coffeehouse, Elliott wave, Exxon Valdez, forensic accounting, global reserve currency, high net worth, index fund, inflation targeting, interest rate derivative, interest rate swap, London Interbank Offered Rate, Long Term Capital Management, margin call, market fundamentalism, Nick Leeson, North Sea oil, Northern Rock, pension reform, Piper Alpha, price stability, purchasing power parity, Real Time Gross Settlement, reserve currency, shareholder value, short selling, The Wealth of Nations by Adam Smith, transaction costs, value at risk, yield curve, zero-coupon bond

Around 200 companies are PLUSquoted with their listing on the PLUS primary market, as at May 2007. 7 Investment banking Introduction Investment banks raise money for clients in the capital markets, and they advise on mergers and acquisitions. Investment banking is also known as corporate finance, and this chapter explains how it works. Read it in conjunction with Chapter 6, which covers new issues. Overview In the lucrative area of investment banking, the procedures for getting together a syndicate of banks, running a book and underwriting are broadly similar for issuing equities, on which this chapter is mainly focused, and debt. Banks are increasingly merging their equities and bonds origination activities. Investment banking also includes mergers and acquisitions advice, covered at the end of this chapter. Elsewhere within the investment bank, traders deal with other banks directly or through money brokers, trading securities for themselves, as proprietary traders, and for investors.

 

pages: 391 words: 102,301

Zero-Sum Future: American Power in an Age of Anxiety by Gideon Rachman

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Asian financial crisis, bank run, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, Bonfire of the Vanities, borderless world, Bretton Woods, BRICs, capital controls, centre right, clean water, collapse of Lehman Brothers, colonial rule, currency manipulation / currency intervention, deindustrialization, Deng Xiaoping, Doha Development Round, energy security, failed state, Fall of the Berlin Wall, financial deregulation, Francis Fukuyama: the end of history, full employment, global reserve currency, greed is good, Hernando de Soto, illegal immigration, income inequality, invisible hand, Jeff Bezos, laissez-faire capitalism, market fundamentalism, Martin Wolf, Mexican peso crisis / tequila crisis, Mikhail Gorbachev, moral hazard, mutually assured destruction, Naomi Klein, offshore financial centre, open borders, open economy, Peace of Westphalia, peak oil, pension reform, Plutocrats, plutocrats, price stability, RAND corporation, reserve currency, rising living standards, road to serfdom, Ronald Reagan, shareholder value, Sinatra Doctrine, sovereign wealth fund, special economic zone, Steve Jobs, Stewart Brand, The Chicago School, The Great Moderation, The Myth of the Rational Market, Thomas Malthus, trickle-down economics, Washington Consensus, Winter of Discontent

The “Tequila crisis” in Mexico in 1994 showed that the country was still prone to debt and currency disorders. It provoked a short but very deep recession and required emergency loans of billions of dollars from the United States. The emerging-market panic of 1998, which started in Russia, sparked another bout of capital flight in Latin America, mirroring the debt crisis of 1982 that had provoked the free-market reforms in the first place. There were severe downturns and bank runs across Latin America. When I visited Argentina for the first time in 2002, I encountered the tail end of that country’s crisis, leaving me with a vivid impression of what a financial system in crisis looks like. The banks resembled mini-fortresses, buttressed by corrugated iron—with one narrow door through which customers filed, in the hope of withdrawing money. The result of the crisis was four years of economic stagnation, which left the “Washington Consensus” a “damaged brand,” in the words of Moises Naim, a journalist and former Venezuelan trade minister.15 Nonetheless, Latin American economies recovered and almost all of the region’s democracies survived.

 

pages: 366 words: 94,209

Throwing Rocks at the Google Bus: How Growth Became the Enemy of Prosperity by Douglas Rushkoff

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3D printing, Airbnb, algorithmic trading, Amazon Mechanical Turk, Andrew Keen, bank run, banking crisis, barriers to entry, bitcoin, blockchain, Burning Man, business process, buy low sell high, California gold rush, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, centralized clearinghouse, citizen journalism, clean water, cloud computing, collaborative economy, collective bargaining, colonial exploitation, Community Supported Agriculture, corporate personhood, crowdsourcing, cryptocurrency, disintermediation, diversified portfolio, Elon Musk, Erik Brynjolfsson, ethereum blockchain, fiat currency, Firefox, Flash crash, full employment, future of work, gig economy, Gini coefficient, global supply chain, global village, Google bus, Howard Rheingold, IBM and the Holocaust, impulse control, income inequality, index fund, iterative process, Jaron Lanier, Jeff Bezos, jimmy wales, job automation, Joseph Schumpeter, Kickstarter, loss aversion, Lyft, Mark Zuckerberg, market bubble, market fundamentalism, Marshall McLuhan, means of production, medical bankruptcy, minimum viable product, Naomi Klein, Network effects, new economy, Norbert Wiener, Oculus Rift, passive investing, payday loans, peer-to-peer lending, Peter Thiel, post-industrial society, profit motive, quantitative easing, race to the bottom, recommendation engine, reserve currency, RFID, Richard Stallman, ride hailing / ride sharing, Ronald Reagan, Satoshi Nakamoto, Second Machine Age, shareholder value, sharing economy, Silicon Valley, Snapchat, social graph, software patent, Steve Jobs, TaskRabbit, trade route, transportation-network company, Turing test, Uber and Lyft, Uber for X, unpaid internship, Y Combinator, young professional, Zipcar

They were stabilizing to real people in real places but destabilizing to those who sought to centralize control over Germany. If anything, the prolonged and unnecessary depression merely paved the way for the discontent that fueled Fascism. Free local currencies were also responsible for providing a means of transaction during the Great Depression in the United States. Some were successful enough to pose a threat to central powers; others were merely successful enough to get traditional banking running again. In a much more pragmatic set of writings than those of Gesell, Yale University economist Irving Fisher argued that the sole focus of an alternative currency in such circumstances should be to increase the velocity of money.60 He advocated the use of “stamp scrip” as a weapon against deflation.61 Stamp scrip would come with the requirement that it be spent and stamped at regular intervals in order to maintain its value.

 

pages: 371 words: 108,317

The Inevitable: Understanding the 12 Technological Forces That Will Shape Our Future by Kevin Kelly

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3D printing, A Declaration of the Independence of Cyberspace, AI winter, Airbnb, Albert Einstein, Amazon Web Services, augmented reality, bank run, barriers to entry, Baxter: Rethink Robotics, bitcoin, blockchain, book scanning, Brewster Kahle, Burning Man, cloud computing, computer age, connected car, crowdsourcing, dark matter, dematerialisation, Downton Abbey, Edward Snowden, Elon Musk, Filter Bubble, Freestyle chess, game design, Google Glasses, hive mind, Howard Rheingold, index card, indoor plumbing, industrial robot, Internet Archive, Internet of things, invention of movable type, invisible hand, Jaron Lanier, Jeff Bezos, job automation, Kevin Kelly, Kickstarter, linked data, Lyft, M-Pesa, Marshall McLuhan, means of production, megacity, Minecraft, multi-sided market, natural language processing, Netflix Prize, Network effects, new economy, Nicholas Carr, peer-to-peer lending, personalized medicine, placebo effect, planetary scale, postindustrial economy, recommendation engine, RFID, ride hailing / ride sharing, Rodney Brooks, self-driving car, sharing economy, Silicon Valley, slashdot, Snapchat, social graph, social web, software is eating the world, speech recognition, Stephen Hawking, Steven Levy, Ted Nelson, the scientific method, transport as a service, two-sided market, Uber for X, Watson beat the top human players on Jeopardy!, Whole Earth Review

These tools, more than just reading, are the foundations of literacy. If text literacy meant being able to parse and manipulate texts, then the new media fluency means being able to parse and manipulate moving images with the same ease. But so far, these “reader” tools of visuality have not made their way to the masses. For example, if I wanted to visually compare recent bank failures with similar historical events by referring you to the bank run in the classic movie It’s a Wonderful Life, there is no easy way to point to that scene with precision. (Which of several sequences did I mean, and which part of them?) I can do what I just did and mention the movie title. I might be able to point to the minute mark for that scene (a new YouTube feature). But I cannot link from this sentence to only those exact “passages” inside an online movie.

 

pages: 430 words: 140,405

A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers by Lawrence G. Mcdonald, Patrick Robinson

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

asset-backed security, bank run, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, diversification, fixed income, high net worth, hiring and firing, if you build it, they will come, London Interbank Offered Rate, Long Term Capital Management, margin call, moral hazard, mortgage debt, naked short selling, new economy, Ronald Reagan, short selling, sovereign wealth fund, value at risk

Everywhere you looked there was disquiet, unhappiness, malice, and unrest. New people arrived who did not fit in, and established staff members could feel the difference so sharply that at one point it seemed everyone I knew was looking for a new job. It’s a strange truth, but when you have the right mix of people, and there’s mutual respect for what other people do and how they operate, a corporation such as an investment bank runs really smoothly. But it never takes much to screw that up, and once that happens, suddenly the chemistry has gone. I suppose it’s like that in sports teams too, probably in everything. All I knew was I had to get out of there. I was still seeking the holy grail, and the son of a bitch had to be somewhere. But it was not in the hive of buzzing discontent that was my present office. Larry McCarthy knew the situation.

 

pages: 441 words: 136,954

That Used to Be Us by Thomas L. Friedman, Michael Mandelbaum

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

3D printing, Affordable Care Act / Obamacare, Albert Einstein, Amazon Web Services, American Society of Civil Engineers: Report Card, Andy Kessler, Ayatollah Khomeini, bank run, barriers to entry, Berlin Wall, blue-collar work, Bretton Woods, business process, call centre, carbon footprint, Carmen Reinhart, Cass Sunstein, centre right, Climatic Research Unit, cloud computing, collective bargaining, corporate social responsibility, Credit Default Swap, crowdsourcing, delayed gratification, energy security, Fall of the Berlin Wall, fear of failure, full employment, Google Earth, illegal immigration, immigration reform, income inequality, job automation, Kenneth Rogoff, knowledge economy, Lean Startup, low skilled workers, Mark Zuckerberg, market design, more computing power than Apollo, Network effects, obamacare, oil shock, pension reform, Report Card for America’s Infrastructure, rising living standards, Ronald Reagan, Rosa Parks, Saturday Night Live, shareholder value, Silicon Valley, Silicon Valley startup, Skype, Steve Jobs, the scientific method, Thomas L Friedman, too big to fail, University of East Anglia, WikiLeaks

At the same time, regulations and regulatory bodies provide the vital foundation of trust that fosters innovation and risk-taking. The creation of the Securities and Exchange Commission in 1934 increased the importance of the New York Stock Exchange by making it a less risky place. The Federal Deposit Insurance Corporation, created by the Banking Act of 1933, substantially reduced the chance of bank runs, and the stability of the FDIC helped attract capital from around the world. The North American Free Trade Agreement, which went into effect in 1994, created a regulatory framework that has triggered massive cross-border investments and trade between the United States and both Mexico and Canada. America’s patent laws, which protect the intellectual property of innovators, encourage even foreigners to register their patents in America, where they know their ideas will not be stolen—unlike in China.

 

pages: 586 words: 159,901

Wall Street: How It Works And for Whom by Doug Henwood

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

accounting loophole / creative accounting, affirmative action, Andrei Shleifer, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, borderless world, Bretton Woods, British Empire, capital asset pricing model, capital controls, central bank independence, corporate governance, correlation coefficient, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, dematerialisation, diversification, diversified portfolio, Donald Trump, equity premium, Eugene Fama: efficient market hypothesis, experimental subject, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, George Gilder, hiring and firing, Hyman Minsky, implied volatility, index arbitrage, index fund, interest rate swap, Internet Archive, invisible hand, Isaac Newton, joint-stock company, Joseph Schumpeter, kremlinology, labor-force participation, late capitalism, law of one price, liquidationism / Banker’s doctrine / the Treasury view, London Interbank Offered Rate, Louis Bachelier, market bubble, Mexican peso crisis / tequila crisis, microcredit, minimum wage unemployment, moral hazard, mortgage debt, mortgage tax deduction, oil shock, payday loans, pension reform, Plutocrats, plutocrats, price mechanism, price stability, prisoner's dilemma, profit maximization, Ralph Nader, random walk, reserve currency, Richard Thaler, risk tolerance, Robert Gordon, Robert Shiller, Robert Shiller, shareholder value, short selling, Slavoj Žižek, South Sea Bubble, The Market for Lemons, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, transcontinental railway, women in the workforce, yield curve, zero-coupon bond

The minutes went on to report detailed observations regarding employment, the average workweek, industrial production, retail sales, business invesment, construction, and the trade picture. (To give a measure of how detailed: "sales of heavy trucks rose sharply, and business purchases likely accounted for some of the recent sizable increase in sales of light trucks; on the other hand, shipments of complete aircraft were weak.") All this discussion of the real economy preceded discussion of financial and monetary affairs, and far exceeded it in volume as well. The central bank runs a huge economic data generation and analysis apparatus, which confi- RENEGADES dently second-guesses official statistics, and, a Fed economist once told me, frequently prompts corrections that are buried in routine monthly revisions in Commerce and Labor Department data. Every twitch in the statistics is noted and mused over to death. And those conclusions are based on public releases of the Fed's minutes.

 

pages: 519 words: 118,095

Your Money: The Missing Manual by J.D. Roth

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

Airbnb, asset allocation, bank run, buy low sell high, car-free, Community Supported Agriculture, delayed gratification, diversification, diversified portfolio, estate planning, Firefox, fixed income, full employment, Home mortgage interest deduction, index card, index fund, late fees, mortgage tax deduction, Own Your Own Home, passive investing, Paul Graham, random walk, Richard Bolles, risk tolerance, Robert Shiller, Robert Shiller, speech recognition, traveling salesman, Vanguard fund, web application, Zipcar

Ask about: Better interest rates. Is there a similar account that might give you a better return? Lower fees. It's a shame to throw money away on service charges and other fees, so ask about free checking or to have fees reduced. Automation. Does the bank have a new website? Do they now offer free billpay? Can they help you set up a direct deposit of your paycheck? Special offers. Is the bank running any promotions? Banks often introduce new products and services to meet customer demand. They're perfectly content, however, to let you keep your old low-interest, high-fee accounts. It's up to you to take the initiative to ask for better deals! Tip It can pay to develop a relationship with a banker. When she gets to know you and your circumstances, she can make suggestions based on your needs and goals.

 

pages: 526 words: 158,913

Crash of the Titans: Greed, Hubris, the Fall of Merrill Lynch, and the Near-Collapse of Bank of America by Greg Farrell

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

Apple's 1984 Super Bowl advert, bank run, banking crisis, bonus culture, call centre, Captain Sullenberger Hudson, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, financial innovation, fixed income, glass ceiling, high net worth, Long Term Capital Management, mass affluent, Mexican peso crisis / tequila crisis, Plutocrats, plutocrats, Ronald Reagan, six sigma, sovereign wealth fund, technology bubble, too big to fail, yield curve

No longer the compliant bunch that rubber-stamped every one of Lewis’s initiatives, BofA’s directors discussed the situation at length, trying to figure out the best way forward. Lewis and their own lack of oversight had brought them to a difficult place, where the future of their own bank was in jeopardy. They were faced with a difficult choice. If BofA tried to bail out of the Merrill deal, the Charlotte bank could trigger a financial panic worse than the bank runs of the previous September, and expose BofA to a massive legal judgment brought by the estate of Merrill Lynch. If the directors accepted the government’s offer of assistance, they would be saddling their shareholders with Merrill Lynch’s black hole of losses. It fell to Meredith Spangler, the oldest member of the board, to ask Lewis the one hardheaded question that needed to be asked: Can you get this in writing?

 

pages: 376 words: 118,542

Free to Choose: A Personal Statement by Milton Friedman, Rose D. Friedman

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

affirmative action, agricultural Revolution, air freight, back-to-the-land, bank run, banking crisis, Corn Laws, Fractional reserve banking, full employment, German hyperinflation, invisible hand, labour mobility, means of production, minimum wage unemployment, oil shale / tar sands, oil shock, price stability, Ralph Nader, RAND corporation, rent control, road to serfdom, school vouchers, Simon Kuznets, The Wealth of Nations by Adam Smith, union organizing, Unsafe at Any Speed, Upton Sinclair, urban renewal, War on Poverty, working poor, Works Progress Administration

However, if everyone tries to get cash at once, the situation is very different—a panic is likely to occur, just as it does when someone cries "fire" in a crowded theater and everyone rushes to get out. One bank alone can meet a run by borrowing from other banks, or by asking its borrowers to repay their loans. The borrowers may be able to repay their loans by withdrawing cash from other banks. But if a bank run spreads widely, all banks together cannot meet the run in this way. There simply is not enough currency in bank vaults to satisfy the demands of all depositors. Moreover, any attempt to meet a widespread run by drawing down vault cash—unless it succeeds promptly in restoring confidence and ends the run so that the cash is redeposited—enforces a much larger reduction in deposits. On the average in 1907, the banks had only $12 of cash for every $100 of deposits.

 

pages: 561 words: 114,843

Startup CEO: A Field Guide to Scaling Up Your Business, + Website by Matt Blumberg

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

airport security, Albert Einstein, bank run, Broken windows theory, crowdsourcing, deskilling, fear of failure, high batting average, high net worth, hiring and firing, Inbox Zero, James Hargreaves, Jeff Bezos, job satisfaction, Kickstarter, knowledge economy, knowledge worker, Lean Startup, Mark Zuckerberg, minimum viable product, pattern recognition, performance metric, pets.com, rolodex, shareholder value, Silicon Valley, Skype

If you have gathered all the input you need and you’re still not sure what to do, give yourself a deadline for making the decision. Try bouncing the decision off a couple of people who you trust to see how it feels to articulate the decision and explain its consequences. Then stick to your deadline and decide one way or the other. No extensions. CHAPTER NINETEEN MAKING SURE THERE’S ENOUGH MONEY IN THE BANK Running a business is very different from managing your personal finances. The revenue is less predictable than a salary; multiple people contribute to expenses; and there’s a lag time between revenue/expense and cash impact. Keeping a watchful eye on cash is especially important for two reasons: funding requirements and funding availability don’t always go hand-in-hand and most startups regularly have to deal with the fundamental quandary of rapid growth being at odds with profitability.

 

pages: 320 words: 87,853

The Black Box Society: The Secret Algorithms That Control Money and Information by Frank Pasquale

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

Affordable Care Act / Obamacare, algorithmic trading, Amazon Mechanical Turk, asset-backed security, Atul Gawande, bank run, barriers to entry, Berlin Wall, Bernie Madoff, Black Swan, bonus culture, Brian Krebs, call centre, Capital in the Twenty-First Century by Thomas Piketty, Chelsea Manning, cloud computing, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, cryptocurrency, Debian, don't be evil, Edward Snowden, en.wikipedia.org, Fall of the Berlin Wall, Filter Bubble, financial innovation, Flash crash, full employment, Goldman Sachs: Vampire Squid, Google Earth, Hernando de Soto, High speed trading, hiring and firing, housing crisis, informal economy, information retrieval, interest rate swap, Internet of things, invisible hand, Jaron Lanier, Jeff Bezos, job automation, Julian Assange, Kevin Kelly, knowledge worker, Kodak vs Instagram, kremlinology, late fees, London Interbank Offered Rate, London Whale, Mark Zuckerberg, mobile money, moral hazard, new economy, Nicholas Carr, offshore financial centre, PageRank, pattern recognition, precariat, profit maximization, profit motive, quantitative easing, race to the bottom, recommendation engine, regulatory arbitrage, risk-adjusted returns, search engine result page, shareholder value, Silicon Valley, Snapchat, Spread Networks laid a new fibre optics cable between New York and Chicago, statistical arbitrage, statistical model, Steven Levy, the scientific method, too big to fail, transaction costs, two-sided market, universal basic income, Upton Sinclair, value at risk, WikiLeaks

The real reason that they are more creditworthy than a collegian is that the government itself implicitly or explicitly backs them.9 There’s no theoretical reason that interest rates couldn’t be reduced for students and raised for banks. But students lack the backroom connections that the finance sector so richly exploits.10 Of course, there has to be some federal support for fi nancial institutions—the bank runs of the Great Depression were too devastating for us to go back to 1920s-style laissez-faire. But the price of government support used to be an intricate set of regulations that strictly limited the risks banks could take. The Dodd-Frank Act of 2010 was supposed to adapt such risk regulation to the contemporary finance sector, but it is being implemented so slowly (and so incompletely) that it is hard to credit it as anything more than window dressing.11 It promises that Congress is “doing something” while leaving enough legal loopholes to ensure that little changes.12 And the quid pro quo between banks and government remains stacked in the banks’ favor.

 

pages: 406 words: 113,841

The American Way of Poverty: How the Other Half Still Lives by Sasha Abramsky

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, Affordable Care Act / Obamacare, bank run, big-box store, collective bargaining, deindustrialization, Francis Fukuyama: the end of history, full employment, ghettoisation, Gini coefficient, housing crisis, illegal immigration, immigration reform, income inequality, indoor plumbing, job automation, Mark Zuckerberg, Maui Hawaii, microcredit, mortgage debt, mortgage tax deduction, new economy, Occupy movement, offshore financial centre, payday loans, Plutocrats, plutocrats, Ponzi scheme, Potemkin village, profit motive, Ronald Reagan, school vouchers, upwardly mobile, War on Poverty, Washington Consensus, women in the workforce, working poor, working-age population, Works Progress Administration

But we absolutely have pockets of poverty—and now it’s spreading more to suburban areas—to Jefferson Parish, to the suburbs. Also rural poverty; we have a fairly large diocese. The percentage of poverty is higher in the rural counties and parishes. It’s a serious concern for us, say, in Washington Parish, where there’s not much economics driving things. We have challenges geographically. It’s spreading; it’s not just an urban phenomenon. We see the homeless population increasing; food banks run low. If you talk to our food bank directors, they’ll tell you it’s a continuing challenge to keep the banks stocked. In our imagination, we hermetically seal off this kind of saga from the broader American story. We like to think that the “pockets” of poverty referred to by Costanza are just that: isolated pockets in a land of plenty. That sense of the poor being somehow “different” probably had a lot to do with how the food pantry worker outside of New Orleans could answer my query for people to interview with the disclaimer that too many minorities were coming to her pantry from New Orleans, were taking food and clothes, and were then selling them in flea markets in the Big Easy.

 

pages: 448 words: 142,946

Sacred Economics: Money, Gift, and Society in the Age of Transition by Charles Eisenstein

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

Albert Einstein, back-to-the-land, bank run, Bernie Madoff, big-box store, Bretton Woods, capital controls, clean water, collateralized debt obligation, credit crunch, David Ricardo: comparative advantage, debt deflation, deindustrialization, delayed gratification, disintermediation, diversification, fiat currency, financial independence, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, global supply chain, happiness index / gross national happiness, hydraulic fracturing, informal economy, invisible hand, Jane Jacobs, land tenure, Lao Tzu, liquidity trap, lump of labour, McMansion, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, new economy, oil shale / tar sands, Own Your Own Home, peak oil, phenotype, Ponzi scheme, profit motive, quantitative easing, race to the bottom, Scramble for Africa, special drawing rights, spinning jenny, technoutopianism, the built environment, Thomas Malthus, too big to fail

This might require research, familiarity with industries and markets, and knowledge of the borrower’s reputation and circumstances. It could also encompass the social and ecological effects of the investment. Whatever entity performs this function, be it a traditional bank, cooperative, or P2P community, must have a good general understanding of business and must be willing to assume responsibility for its evaluations. New forms of P2P banking run up against the same general problem of determining creditworthiness over the anonymous gulf of cyberspace. One could imagine a system in which a database connects you, who have $5,000 you want to lend for six months, to a distant person who wants to borrow it for six months. You don’t know her. How do you know she is creditworthy? Perhaps some user rating system à la eBay could provide a partial solution, but such systems are easily gamed.

 

pages: 380 words: 118,675

The Everything Store: Jeff Bezos and the Age of Amazon by Brad Stone

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

3D printing, airport security, AltaVista, Amazon Mechanical Turk, Amazon Web Services, bank run, Bernie Madoff, big-box store, Black Swan, book scanning, Brewster Kahle, call centre, centre right, Clayton Christensen, cloud computing, collapse of Lehman Brothers, crowdsourcing, cuban missile crisis, Danny Hillis, Douglas Hofstadter, Elon Musk, facts on the ground, game design, housing crisis, invention of movable type, inventory management, James Dyson, Jeff Bezos, Kevin Kelly, Kodak vs Instagram, late fees, loose coupling, low skilled workers, Maui Hawaii, Menlo Park, Network effects, new economy, optical character recognition, pets.com, Ponzi scheme, quantitative hedge fund, recommendation engine, Renaissance Technologies, RFID, Rodney Brooks, search inside the book, shareholder value, Silicon Valley, Silicon Valley startup, six sigma, skunkworks, Skype, statistical arbitrage, Steve Ballmer, Steve Jobs, Steven Levy, Stewart Brand, Thomas L Friedman, Tony Hsieh, Whole Earth Catalog, why are manhole covers round?

With the additional capital from the bond raise in Europe, Amazon had nearly a billion dollars in cash and securities, enough to cover all of its outstanding accounts with suppliers. Moreover, the company’s negative-working-capital model would continue to generate cash from sales to fund its operations. Amazon was also well along in the process of cutting costs. The real danger for Amazon was that the Lehman report might turn into a self-fulfilling prophecy. If Suria’s predictions spooked suppliers into going on the equivalent of a bank run and demanding immediate payment from Amazon for their products, Amazon’s expenses might rise. If Suria frightened customers and they turned away from Amazon because they believed, from the ubiquitous news coverage, that the Internet was only a fad, Amazon’s revenue growth could go down. Then it really could be in trouble. In other words, the danger for Amazon was that in their wrongness, Suria and other Wall Street bears might prove themselves right.

 

pages: 514 words: 153,092

The Forgotten Man by Amity Shlaes

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

anti-communist, bank run, banking crisis, collective bargaining, currency manipulation / currency intervention, Frederick Winslow Taylor, invisible hand, Mahatma Gandhi, Plutocrats, plutocrats, short selling, Upton Sinclair, wage slave, Works Progress Administration

Some of the projects were mere extensions of Hoover’s efforts, no matter what Hoover said. Roosevelt asked for war powers to handle the emergency, just as Hoover had suggested in a note during the interregnum. Hoover had called for a bank holiday to end the banking crisis; Roosevelt’s first act was to declare a bank holiday to sort out the banks and build confidence. Now Roosevelt’s team worked with Republicans to write the first emergency legislation to stop the bank runs. Hoover had had Ogden Mills; Roosevelt had another respectable man as treasury secretary, Will Woodin. Ray Moley would later write of that period, “Mills, Woodin, Ballantine, Awalt, and I had forgotten to be Republicans or Democrats. We were just a bunch of men trying to save the banking system.” In this period Washington asked the two banks in Detroit, Father Coughlin’s hometown, to merge, and Woodin placed or took a call with Coughlin to win his support.

 

pages: 514 words: 152,903

The Best Business Writing 2013 by Dean Starkman

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

Asperger Syndrome, bank run, Basel III, call centre, clean water, cloud computing, collateralized debt obligation, Columbine, computer vision, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, Erik Brynjolfsson, eurozone crisis, Exxon Valdez, factory automation, full employment, Goldman Sachs: Vampire Squid, hiring and firing, hydraulic fracturing, income inequality, jimmy wales, job automation, late fees, London Whale, low skilled workers, Mahatma Gandhi, market clearing, Maui Hawaii, Menlo Park, Occupy movement, oil shale / tar sands, price stability, Ray Kurzweil, Silicon Valley, Skype, sovereign wealth fund, stakhanovite, Steve Jobs, Stuxnet, the payments system, too big to fail, Vanguard fund, wage slave, Y2K

Northern Europe’s savings were steering clear of southern Europe’s borrowers. So despite a wave of policy overhauls by new national leaders, Italian and Spanish borrowing costs were rising to unsustainable levels. As they rose, so did borrowing costs for the countries’ small businesses, and they were gasping for affordable credit. Political turmoil in Greece raised the odds of a euro exit that many feared would trigger bank runs across Europe’s south. Companies around Europe made preparations for a breakup of the euro. Investors were increasingly pricing in catastrophe. Mr. Draghi and allies on the ECB’s executive board, especially Benoit Coeure of France and Jorg Asmussen of Germany, decided they needed a contingency plan. In late June, they and a few staff members began working in secret on a new bond-buying plan, one without the flaws of the previous effort.

 

pages: 388 words: 125,472

The Establishment: And How They Get Away With It