banking crisis

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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

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

Which aspect of a financial crisis is more important in determining the severity of a recession: the run-up in private-debt burdens or the banking crisis? Research by Oscar Jorda, Moritz Schularick, and Alan Taylor helps answer this question.19 They looked at over two hundred recessions in fourteen advanced countries between 1870 and 2008. They begin by confirming the basic Reinhart and Rogoff pattern: Banking-crisis recessions are much more severe than normal recessions. But Jorda, Schularick, and Taylor also find that banking-crisis recessions are preceded by a much larger increase in private debt than other recessions. In fact, the expansion in debt is five times as large before a banking-crisis recession. Also, banking-crisis recessions with low levels of private debt are similar to normal recessions. So, without elevated levels of debt, banking-crisis recessions are unexceptional. They also demonstrate that normal recessions with high private debt are more severe than other normal recessions.

While spending on other durable goods did not fall quite as early as residential investment, it still fell before the heart of the banking crisis. Compared to 2006, furniture purchases in 2007 were down 1.4 percent, and expenditures at home-improvement stores were down 4 percent. Spending on appliances was still up 2 percent in 2007, but the growth was significantly lower than the 7 percent growth in 2005 and 2006. Looking within the year of 2008, however, provides important insights. The heart of the banking crisis began in September 2008, when both Lehman Brothers and AIG collapsed. So by focusing on January through August, we can estimate the pre-banking-crisis spending decline in 2008. As a benchmark, we want to compare spending in January through August 2008 to that in January through August 2007, because retail sales are seasonal.

They also demonstrate that normal recessions with high private debt are more severe than other normal recessions. Even if there is no banking crisis, elevated levels of private debt make recessions worse. However, they show that the worst recessions include both high private debt and a banking crisis.20 The conclusion drawn by Jorda, Schularick, and Taylor from their analysis of a huge sample of recessions is direct: We document, to our knowledge for the first time, that throughout a century or more of modern economic history in advanced countries a close relationship has existed between the build-up of credit during an expansion and the severity of the subsequent recession. . . . [W]e show that the economic costs of financial crises can vary considerably depending on the leverage incurred during the previous expansion phase [our emphasis].21 Taken together, both the international and U.S. evidence reveals a strong pattern: Economic disasters are almost always preceded by a large increase in household debt.


Global Financial Crisis by Noah Berlatsky

accounting loophole / creative accounting, asset-backed security, banking crisis, Bretton Woods, capital controls, Celtic Tiger, centre right, circulation of elites, collapse of Lehman Brothers, collateralized debt obligation, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, deindustrialization, Doha Development Round, energy security, eurozone crisis, financial innovation, Food sovereignty, George Akerlof, God and Mammon, Gordon Gekko, housing crisis, illegal immigration, income inequality, market bubble, market fundamentalism, mass immigration, moral hazard, new economy, Northern Rock, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, reserve currency, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, South China Sea, structural adjustment programs, too big to fail, trade liberalization, transfer pricing, working poor

Michael Mandel, “A Simple Guide to the Banking Crisis,” Business Week, March 12, 2009. Copyright © 2009 by McGraw-Hill, Inc. Reproduced by permission. 172 Solutions to the Global Financial Crisis I don’t know why I called this a “a simple guide to the banking crisis.” Really, it’s the longest post I’ve written here. But here it is: Why is the banking crisis so hard to solve? We stood and watched while Hank Paulson and Ben Bernanke fumbled with their response in the fall. Now we are being treated to the distressing spectacle of Tim Geithner struggling as well to articulate a clear policy for dealing with zombie banks. How come these smart and powerful men can’t get a handle on the problem? I want to lay out 5 simple propositions which will help you understand why the banking crisis is so intractable. Then I will explain what happens next.

The healthy part of Gota Bank was sold cheaply to Nordbanken; the rest was put in Retriva, another “bad bank” created by the government. Banks Can Survive the Crisis Without Nationalization But this is as far [as] Sweden’s experience of bank nationalization goes. And it is hardly a bed-time story for friends of bank nationalization today in the US or the UK [United Kingdom]. So—what are the lessons from the Swedish banking crisis for crisis responses today? One key element of the response to the banking crisis was to avoid nationalization. First, all the big banks had big credit losses, but they survived without being taken over by the government. Nor did they become zombie banks [banks which are bust, but which continue to operate solely because of government guarantees or support], the profitability of these banks returned to high levels only a few years after the crisis started.

On September 7, 2008, Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation), the two largest mortgage lenders in the United States, had to be bailed out by the U.S. government. On September 15, 2008, Lehman Brothers, another large bank, declared bankruptcy. In the following weeks, Washington Mutual also collapsed. The U.S. government also stepped in to save the nation’s largest insurance company, AIG. The rescue package was $85 billion. The banking crisis was not confined to the United States. In the first place, other nations had their own housing bubbles. Even more important, banks and investors around the world had placed money in U.S. mortgages. As Jim Haughey wrote on the blog Market Insights, “Foreign investors were net buyers of about $20 billion a month of agency bonds throughout the 2004–05 housing boom and through mid-2008.” Thus, foreign banks faced many of the same problems U.S. banks did when the U.S. housing bubble burst.


pages: 309 words: 85,584

Nine Crises: Fifty Years of Covering the British Economy From Devaluation to Brexit by William Keegan

banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Boris Johnson, Bretton Woods, British Empire, capital controls, congestion charging, deindustrialization, Donald Trump, Etonian, eurozone crisis, Fall of the Berlin Wall, financial innovation, financial thriller, floating exchange rates, full employment, gig economy, inflation targeting, Just-in-time delivery, light touch regulation, liquidity trap, Martin Wolf, moral hazard, negative equity, Neil Kinnock, non-tariff barriers, North Sea oil, Northern Rock, oil shock, Parkinson's law, Paul Samuelson, pre–internet, price mechanism, quantitative easing, Ronald Reagan, school vouchers, short selling, South Sea Bubble, The Chicago School, transaction costs, tulip mania, Winter of Discontent, Yom Kippur War

The other was the ‘secondary banking crisis’ of 1973–75. The March 1976 episode figures in the chapter on the IMF crisis of that autumn. The secondary banking crisis, although it preceded the financial crisis of 2007–09 by several decades, nevertheless had a lasting impact on both the Treasury’s and the Bank’s attitudes towards financial supervision. Under a monetary regime known as competition and credit control, the Heath government and the Bank had bowed to the burgeoning movement in favour of giving freer rein to market forces, allowing greater competition for borrowers by banks and building societies – in other words, breaking up what was seen as a cartel. The episode has been extensively covered in some excellent accounts, such as Margaret Reid’s The Secondary Banking Crisis. In a nutshell, the policy encouraged a proliferation of dubious and risky lending institutions, which ended in tears – almost including the collapse of the mighty NatWest bank – and required a major rescue operation by the Bank of England.

Much has been written about the connections between all those derivative financial products that proved worthless. But it is an open question whether they were the truest cause of the banking crisis that began in the United States and spread further afield – though not, interestingly, to nearby Canada. I recall the first time I met Mark Carney, who subsequently became Governor of the Bank of England. It was in January 2009. We were the only occupants of a funicular lift, bringing us down to the main street in Davos – from, it has to be admitted, rather a good drinks party hosted by Barclays Bank. ‘Hi!’ said the other occupant. ‘I’m Mark Carney, Governor of the Bank of Canada.’ After I had duly introduced myself, he said, ‘We didn’t have a banking crisis in Canada.’ Canada’s experience was the exception to the rule that, in a globalised financial world, with sub-prime ‘paper’ turning up on bank balance sheets all over Europe, it was difficult to avoid being tainted by the crisis.

I refrained from giving him the response that ordinary members of the public would have given him.’ This reminded me of the time I was attending a high-powered seminar in Washington in the aftermath of the banking crisis and Paul Volcker, an outstanding chairman of the US Federal Reserve in the early 1980s, made a comment on the following lines: ‘People tell me here in Washington that bankers’ bonuses are justified because otherwise bankers will move from New York to London. But I read in the Financial Times this morning that high bonuses are being justified in London on the grounds that otherwise bankers will move to New York.’ Volcker also spoke very much to the point when he stated in the wake of the banking crisis – in my opinion only half-jokingly – that, for all the development of ‘new financial products’, the only worthwhile financial innovation in recent decades had been the cash machine, otherwise known as the ATM.


pages: 576 words: 105,655

Austerity: The History of a Dangerous Idea by Mark Blyth

"Robert Solow", accounting loophole / creative accounting, balance sheet recession, bank run, banking crisis, Black Swan, Bretton Woods, business cycle, buy and hold, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, correlation does not imply causation, creative destruction, 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, information asymmetry, interest rate swap, invisible hand, Irish property bubble, Joseph Schumpeter, Kenneth Rogoff, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, Long Term Capital Management, market bubble, market clearing, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Occupy movement, offshore financial centre, paradox of thrift, Philip Mirowski, 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, zero-sum game

How this occurred is the subject of the next two chapters, but that it occurred is worth reminding ourselves now. This is a banking crisis first and a sovereign debt crisis second. That there is a crisis in sovereign debt markets, especially in Europe, is not in doubt. But that is an effect, not a cause. There was no orgy of government spending to get us there. There never was any general risk of the whole world turning into Greece. There is no risk of the United States ever going bust anytime soon. There is no crisis of sovereign debt caused by sovereigns’ spending unless you take account of actual spending and continuing liabilities caused by the rupture of national banking systems. What begins as a banking crisis ends with a banking crisis, even if it goes through the states’ accounts. But there is a politics of making it appear to be the states’ fault such that those who made the bust don’t have to pay for it.

Yet they remain the governing ideas of the moment. By the time the book is published this may no longer be the case, but in the meantime, these ideas will have wrought tremendous damage. Part of the reason for this is, as we shall see, ideological. But part of the reason these ideas are so powerful is very material. It has to do with how a “too big too fail” banking crisis in the United States became a “too big to bail” banking crisis in Europe, and how this drives us all down the road to austerity. We are, at best, still saving the banks that we started saving in 2008, especially in Europe. This book allowed me to work out why such bad ideas remain the governing ideas, for both ideological and material reasons. But going back to the book after doing the video made me remember another much more personal reason why I should write this book that has to do with the unfairness of austerity as a policy.

The cost of bailing, recapitalizing, and otherwise saving the global banking system has been, depending on, as we shall see later, how you count it, between 3 and 13 trillion dollars.9 Most of that has ended up on the balance sheets of governments as they absorb the costs of the bust, which is why we mistakenly call this a sovereign debt crisis when in fact it is a transmuted and well-camouflaged banking crisis. As we shall see in chapter 2, the US banking system, the origin of the global banking crisis, was deemed by the US government to be “too big to fail” and therefore wasn’t allowed to fail when it got into trouble in 2007–2008. The price of not allowing it to fail was to turn the Federal Reserve into a “bad bank” (chock-full of bad assets that were swapped for cash to keep lending going) while the federal government blew a hole in its finances as it plugged the gaps caused by lost revenues from the crash with deficit spending and debt issuance.


pages: 358 words: 119,272

Anatomy of the Bear: Lessons From Wall Street's Four Great Bottoms by Russell Napier

Albert Einstein, asset allocation, banking crisis, Bretton Woods, business cycle, buy and hold, collective bargaining, Columbine, cuban missile crisis, desegregation, diversified portfolio, floating exchange rates, Fractional reserve banking, full employment, hindsight bias, Kickstarter, Long Term Capital Management, market bubble, mortgage tax deduction, Myron Scholes, new economy, oil shock, price stability, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, short selling, stocks for the long run, yield curve, Yogi Berra

In the overall economy, the pace accelerated markedly in the second half of 1930, influenced by the first banking crisis, which erupted in October of that year. The first half of 1931 saw the only marginal recovery in the economy during the 1929-32 contraction as GNP and real department-store sales both increased. This recovery was thrown off track by the second banking crisis, apparent domestically in March 1931 and intensified by the banking crisis in Europe, which hit the headlines in early May. In terms of the course of the recession, as measured by GNP in constant dollars, only 35% of what was to be the total contraction had occurred by the end of June 1931. The real break from the normal pattern of the business cycle was the impact of the second banking crisis and growing concern about exchange rate stability, which from June 1931 to December 1932 accounted for almost two-thirds of the total economic contraction.

However, with the onset of the banking crisis of October 1930, prices began to decline. While slow at first, this was the beginning of a new price trend that would not run its course until the summer of 1932. It exacerbated problems for bankers going in to 1931 as they were forced to mark these liquid investments to market. There were some signs of economic stability in early 1931, but this resulted in only a modest rally in the equity market. During the banking crisis, the DJIA reached a low of 157.5 on 16 December 1930. By 24 February 1931, it had risen 23% and was just 2.2% below the low of November 1929. Even at this stage, the magnitude of the decline in the index was only marginally in excess of the 1907 and 1919-21 bear markets. It was now that the second bank crisis hit. An investor committing funds to equities on 24 February 1931, almost 16 months after the October 1929 crash, would witness a 79% drop in the DJIA in the next 17 months.

As more than half of all German bank deposits were owned by non-Germans, a loss of confidence by these investors had very serious international consequences. There was a full-scale banking crisis in Germany by July and exchange controls followed. As US bank deposits in Austria, Hungary and Germany were frozen, the stability of US bank balance sheets were further undermined. This further question mark over US bank balance sheets prompted the American public to hold even greater cash balances at the expense of deposits. Total deposits of all banks declined from $58,092 million in December 1930 to $56,092 million in June 1931, then $49,509 million by December 1931. The US banking system held less in deposits in December 1931 than it had in December 1924. The banks were forced to again adjust their asset portfolios and corporate bonds were dumped with prices sinking further. The US was now beset by its second banking crisis in less than a year. The country’s leading experts had confidently predicted the Federal Reserve System would prevent such events.


Crisis and Dollarization in Ecuador: Stability, Growth, and Social Equity by Paul Ely Beckerman, Andrés Solimano

banking crisis, banks create money, barriers to entry, business cycle, capital controls, Carmen Reinhart, carried interest, central bank independence, centre right, clean water, currency peg, declining real wages, disintermediation, financial intermediation, fixed income, floating exchange rates, Gini coefficient, income inequality, income per capita, labor-force participation, land reform, London Interbank Offered Rate, Mexican peso crisis / tequila crisis, microcredit, money: store of value / unit of account / medium of exchange, offshore financial centre, old-boy network, open economy, pension reform, price stability, rent-seeking, school vouchers, seigniorage, trade liberalization, women in the workforce

However, as the commercial banking system was in such a fragile condition in Ecuador at the time of dollarization, a special contingency fund for banks in distress was created following official dollarization. From this perspective, this fund can be viewed something like a lender of last resort in the event of a banking crisis. Moreover, as has been the case in history, for example in the United States during episodes of banking crisis before 1913, the year the Federal Reserve System was created, the resolution of banking crisis or liquidity shocks was arranged by private financiers such as J. P. Morgan. In other cases, the resources for performing the functions of lender of last resort can come from the fiscal budget or from foreign borrowing. The Adjustment Mechanism of the Dollarized Economy An economy operating with a foreign currency as the legal tender works in several respects like the economies under the gold standard of the pre1913 world.

Most of the ingredients of high inflation and acute monetary instability were present: (a) a flight from national money and de-facto dollarization2 as nationals and foreigners in Ecuador lost all confidence in the capacity of the sucre to serve its store-of-value function, (b) large fiscal deficits, (c) a sharp contraction in real economic activity, and (d) a severe banking crisis.3 The increasingly cornered government, led by President Jamil Mahuad, a highly educated and intellectually sophisticated socialdemocrat, could not gather congressional support for passing crucial tax legislation and other measures to stabilize the economy. This situation, combined with the near paralysis of the international financial institutions based in Washington, helped bring about an economic meltdown manifested in very high inflation, a banking crisis, economic depression, and social disarray during most of 1999. It is important to recognize that the Ecuadoran crisis took place in a delicate situation of security within the Andean region.

Dollars at 1998 Prices), 1990–2000 ..............................39 2.9 Ecuador: Nonfinancial Public-Sector Overall and Primary Surplus (US$ Million at 1998 Prices and Exchange Rate), 1990–2000. ...............................................................................................42 2.10 Ecuador: Onshore Commercial-Bank Deposits (US$ Million) .......48 2.11 Ecuador: Onshore Commercial-Bank Loans Performing Normally and in Arrears ......................................................................49 2.12 Ecuador: Indicators of Macroeconomic Imbalance, 1988–2000 ......52 2.13 Ecuador: Consumer Prices, 1995–2000 ..............................................55 3.1 Ecuador: Monthly Trade-weighted Exchange-rate Competitiveness, December 1994–December 2001...............................................103 3.2 Ecuador: Monthly Increases in Consumer Prices, January 1999–December 2001............................................................................103 3.3 Ecuador: Consumer Prices and Weighted Trading-partner Prices at the Current Exchange Rate, December 1997–December 2001 ......................................................104 3.4 Ecuador: Quarterly Real GDP (1998 average =100), 1997.4–2001.4.........................................................................................109 CONTENTS 3.5 vii Ecuador: Quarterly Nonfinancial Public-sector Revenue (US$ million), 1998.2–2001.4 ..............................................................110 3.6 Ecuador: Quarterly Nonfinancial Public-sector Expenditure (US$ million), 1998.2–2001.4 ...............................................................111 3.7 Ecuador: Quarterly Performance of the Main Components of the Current Account of the Balance of Payments (US$ million), 1998.1–2001.4 .........................................................................................113 3.8 Ecuador: Monthly Merchandise Trade and Real-effective Exchange Rate (December 1996–October 2001)...............................117 4.1 Ecuador: Real Wage and Urban Poverty Trends (index, 1990 = 100) ..............................................................................134 4.2 Malnutrition Rates in Latin America ...............................................139 4.3 Malnutrition in Ecuador: Stunting (%) by Consumption Quintiles, 1998 and 1999 ....................................................................139 4.4 Malnutrition in Ecuador: Stunting (%) by Area and Region, 1998–2000 ..............................................................................................140 4.5 Ecuador, Jamaica, Honduras: Years of Educational Attainment by Age Cohort .....................................................................................141 4.6 Ecuador: Educational Attainment by Rural and Urban Areas (persons over 24 years old ) ..............................................................143 4.7 Ecuador: Gender Gap in Education .................................................144 4.8 Ecuador: Percentage of 18-Year-Olds Completing School ............145 4.9 Ecuador: Percent of Children Working, 1999 ..................................146 4.10 Ecuador: Social Spending per Capita, 1995–2001 (in US$) ...........148 5.1 Factors Affecting Vulnerability to Exogenous Shocks....................181 This page intentionally left blank Preface Understanding the nature of deep economic crises and social disarray and formulating adequate exchange rate and other policies for stabilization, growth, and social equity are topics of great importance in developing countries and emerging economies in the turbulent world of the early 21st century. The experience of Ecuador in the late 1990s and the early 21st century showcases a country with structural problems of low growth, regional divides, and social and ethnic fragmentation made more acute by a severe currency and banking crisis in the late 1990s. Ecuador’s response to the crisis centered on the adoption of foreign money—dollarization— as a last-resort measure to cope with total distrust in the national currency and domestic institutions after repeated cycles of failed stabilization and crisis. This book assesses several aspects of the Ecuadoran experience, including a historical analysis of the main features of the country’s economic development and the main political economy features that set the background for the most recent cycle of crisis and stabilization.


pages: 464 words: 139,088

The End of Alchemy: Money, Banking and the Future of the Global Economy by Mervyn King

"Robert Solow", Andrei Shleifer, Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bretton Woods, British Empire, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, collapse of Lehman Brothers, creative destruction, Credit Default Swap, crowdsourcing, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Doha Development Round, Edmond Halley, Fall of the Berlin Wall, falling living standards, fiat currency, financial innovation, financial intermediation, floating exchange rates, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, German hyperinflation, Hyman Minsky, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labour market flexibility, large denomination, lateral thinking, liquidity trap, Long Term Capital Management, manufacturing employment, market clearing, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Nick Leeson, North Sea oil, Northern Rock, oil shale / tar sands, oil shock, open economy, paradox of thrift, Paul Samuelson, Ponzi scheme, price mechanism, price stability, purchasing power parity, quantitative easing, rent-seeking, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Satoshi Nakamoto, savings glut, secular stagnation, seigniorage, stem cell, Steve Jobs, The Great Moderation, the payments system, The Rise and Fall of American Growth, Thomas Malthus, too big to fail, transaction costs, Tyler Cowen: Great Stagnation, yield curve, Yom Kippur War, zero-sum game

The economic consequences were seen well beyond countries that had experienced a banking crisis. My opposite numbers in Brazil and India, for example, talked to me about the puzzle of why demand for cars and steel in their countries had ‘fallen off a cliff’. For almost a year, the collapse in confidence was global. It seemed that, just as in the 1930s, much of what we had to fear was fear itself. Spending had fallen around the world because people feared that others would no longer go on spending. The situation cried out for a Keynesian policy response in the form of monetary and fiscal stimulus. Central banks and governments duly supplied it, and the policy was endorsed by the summit of the Group of Twenty (G20), which included both industrialised and emerging market economies, in London in May 2009. The banking crisis itself could be said to have ended when the US Treasury and Federal Reserve announced on 7 May 2009 the results of the stress tests carried out on US banks to see if they were capable of withstanding the losses incurred under a range of adverse scenarios and the amount of new capital which those banks would be required to raise in the market or accept from the US government – $75 billion in total.

Eliot, The Rock, 1934 INTRODUCTION ‘It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity …’ Charles Dickens, A Tale of Two Cities The past twenty years in the modern world were indeed the best of times and the worst of times. It was a tale of two epochs – in the first growth and stability, followed in the second by the worst banking crisis the industrialised world has ever witnessed. Within the space of little more than a year, between August 2007 and October 2008, what had been viewed as the age of wisdom was now seen as the age of foolishness, and belief turned into incredulity. The largest banks in the biggest financial centres in the advanced world failed, triggering a worldwide collapse of confidence and bringing about the deepest recession since the 1930s.

The economy is behaving in ways that we did not expect, and new ideas will be needed if we are to prevent a repetition of the Great Recession and restore prosperity. Many accounts and memoirs of the crisis have already been published. Their titles are numerous, but they share the same invisible subtitle: ‘how I saved the world’. So although in the interests of transparency I should make clear that I was an actor in the drama – Governor of the Bank of England for ten years between 2003 and 2013, during both the Great Stability, the banking crisis itself, the Great Recession that followed, and the start of the recovery – this is not a memoir of the crisis with revelations about private conversations and behind-the-scenes clashes. Of course, those happened – as in any walk of life. But who said what to whom and when can safely, and properly, be left to dispassionate and disinterested historians who can sift and weigh the evidence available to them after sufficient time has elapsed and all the relevant official and unofficial papers have been made available.


pages: 1,066 words: 273,703

Crashed: How a Decade of Financial Crises Changed the World by Adam Tooze

Affordable Care Act / Obamacare, Apple's 1984 Super Bowl advert, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, Boris Johnson, break the buck, Bretton Woods, BRICs, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, dark matter, deindustrialization, desegregation, Detroit bankruptcy, Dissolution of the Soviet Union, diversification, Doha Development Round, Donald Trump, Edward Glaeser, Edward Snowden, en.wikipedia.org, energy security, eurozone crisis, Fall of the Berlin Wall, family office, financial intermediation, fixed income, Flash crash, forward guidance, friendly fire, full employment, global reserve currency, global supply chain, global value chain, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, housing crisis, Hyman Minsky, illegal immigration, immigration reform, income inequality, interest rate derivative, interest rate swap, Kenneth Rogoff, large denomination, light touch regulation, Long Term Capital Management, margin call, Martin Wolf, McMansion, Mexican peso crisis / tequila crisis, mittelstand, money market fund, moral hazard, mortgage debt, mutually assured destruction, negative equity, new economy, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shale / tar sands, old-boy network, open economy, paradox of thrift, Peter Thiel, Ponzi scheme, predatory finance, price stability, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, reserve currency, risk tolerance, Ronald Reagan, savings glut, secular stagnation, Silicon Valley, South China Sea, sovereign wealth fund, special drawing rights, structural adjustment programs, The Great Moderation, Tim Cook: Apple, too big to fail, trade liberalization, upwardly mobile, Washington Consensus, We are the 99%, white flight, WikiLeaks, women in the workforce, Works Progress Administration, yield curve, éminence grise

The fact that Europe’s bank stress tests lacked the backing of clear recapitalization facilities is highlighted by T. Santos, “El Diluvio: The Spanish Banking Crisis, 2008–2012,” manuscript (2017), Columbia Business School, Columbia University. 52. L. Thomas Jr., “Greek Bonds Lure Some, Despite Risk,” New York Times, September 28, 2011. 53. Bastasin, Saving Europe, 259. 54. Acharya and Steffen, “The Banking Crisis as a Giant Carry Trade Gone Wrong.” 55. B. H. Cohen, “How Have Banks Adjusted to Higher Capital Requirements?,” BIS Quarterly Review, 2013, 25. 56. Report of the Joint Committee of Inquiry into the Banking Crisis, Houses of the Oireachtas (Inquiries, Privileges and Procedures) Act, 2016. 57. C. Gleeson, “Ireland’s Austerity Budgets,” Irish Times, December 13, 2013. 58.

IV There are many risks involved in forming a currency union and it would no doubt have made sense for Europe to have added a fiscal constitution. But Europe’s chief problem was not the lack of a fiscal fire code. Its problem was the lack of a financial fire department.46 The failure of state building that mattered most was not fiscal union but the failure to build the capacity to handle a banking crisis. Coping with highly integrated financial capitalism requires a state that is disciplined, has the capacity to act and has the will to do so. Coping with a banking crisis on the scale that was brewing in Europe required a very capable state indeed. How badly such a facility was needed becomes clear only when we put together the local and global activities of Europe’s banks, to get a full view of their spectacularly overinflated growth. America’s banks were very big and very important to global finance.

Lane, “The Funding of the Irish Domestic Banking System During the Boom,” Journal of the Statistical and Social Inquiry Society of Ireland 44 (2014), 40–71. 41. S. Royo, “How Did the Spanish Financial System Survive the First Stage of the Global Crisis?,” Governance 26 (October 2013), 631–656; Santos, “Antes del Diluvio.” 42. A. Cárdenas, “The Spanish Savings Bank Crisis: History, Causes and Responses” (Working Paper 13-003, Universitat Oberta de Catalunya, 2013); and Santos, “Antes del Diluvio.” 43. T. Santos, “El Diluvio: The Spanish Banking Crisis, 2008–2012,” manuscript, Columbia Business School, Columbia University (2017). 44. Santos, “Antes del Diluvio.” 45. I. Jack, “Ireland: The Rise and the Crash,” New York Review of Books, November 11, 2010, reviewing F. O’Toole, Ship of Fools: How Stupidity and Corruption Sank the Celtic Tiger (London: Faber and Faber, 2009). 46.


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

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, break the buck, business cycle, 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, fixed income, George Akerlof, Growth in a Time of Debt, income inequality, information asymmetry, invisible hand, Jean Tirole, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, Larry Wall, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, margin call, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Nick Leeson, Northern Rock, open economy, peer-to-peer lending, regulatory arbitrage, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Satyajit Das, shareholder value, sovereign wealth fund, technology bubble, The Market for Lemons, the payments system, too big to fail, Upton Sinclair, Yogi Berra

Ostensibly designed to force banks to invest safely, these rules have often been used to ensure that local borrowers, including the government, would get ample funding at good terms.25 The crises of the 1980s and 1990s, however, showed that investing at home is not the same as investing safely. For example, in Texas the S&L crisis of the late 1980s came sooner, beginning already in 1986, and was stronger than in most other states because Texan real estate and mortgage markets were uniquely affected by the oil price slump of 1985. In Sweden the banking crisis of 1992 was stronger than other countries’ banking crises in the early 1990s because, in trying to protect the exchange rate, the Swedish central bank pushed interest rates for overnight borrowing to a record 500 percent per year, after which there was a dramatic downturn in real estate markets.26 In the United States, such rules were also meant to prevent banks from becoming too large.27 By now, these rules have mostly been lifted.

Because deposits are a form of debt, borrowing is an essential part of banking. Does this mean that banks would provide fewer benefits to the economy if they relied less on borrowing and used more equity? The answer is “No.” Banks have always been fragile and prone to trouble. The very word bankruptcy, common to many languages, alludes to banks.2 The history of banking has been full of crashes and crises. The period between 1940 and 1970, when there was hardly a banking crisis and few bank failures, was a remarkable exception.3 The incidence of crashes and crises since 1970 is not much different from past experience of financial instability, for example, in the nineteenth century.4 Banking experts often start from the observation that, with their reliance on deposits, banks have always been susceptible to runs, and they conclude that fragility in banking is inevitable.

Promoting the competitive success of banks in global markets is not in the public interest if this success is due to banks’ taking excessive risks at the expense of the taxpayers. Many countries have paid dearly for the successes of their banks. Encouraging the banks to fund the government is also not in the public interest if such funding endangers the banks. Such funding may be convenient for politicians who want to hide the costs of their policies, but if a government defaults on its debt and this is accompanied by a banking crisis, the consequences can be disastrous for many people.39 The need for effective regulation is acute. The large scale of bankers’ gambles and the high degree of interconnectedness in the financial system make that system very fragile. If some large and highly connected bank or other financial institution fails, it can destabilize the entire financial system and inflict enormous damage on all of us.


The Limits of the Market: The Pendulum Between Government and Market by Paul de Grauwe, Anna Asbury

"Robert Solow", banking crisis, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, conceptual framework, crony capitalism, Erik Brynjolfsson, eurozone crisis, Honoré de Balzac, income inequality, income per capita, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kitchen Debate, means of production, moral hazard, Paul Samuelson, price discrimination, price mechanism, profit motive, Robert Gordon, Ronald Coase, Simon Kuznets, The Nature of the Firm, The Rise and Fall of American Growth, too big to fail, transaction costs, trickle-down economics, ultimatum game, very high income

That exacerbated the economic collapse. After the banking crisis of  the central banks and governments in most countries responded completely differently. The central banks all pumped lots of money into the economy while governments permitted rises in the budget deficit. This soon put a stop to the * It is worth noting that Milton Friedman, the father of monetarism, popularized this criticism in his book (co-written with Anna Jacobson Schwartz) A Monetary History of the United States, – (Princeton, NJ: Princeton University Press, ). According to Friedman the US Federal Reserve made the mistake of pumping too little money into the economy, making the Great Depression in the US much worse.  P E N D U L U M S W I N G S : MARKETS AND GOVERNMENT S 100 95 Banking crisis (from 2008) 90 85 Great Depression (from 1929) 80 75 70 65 60 5 10 15 20 25 30 35 40 MONTHS FROM THE PEAK June 1929 45 50 April 2008 = 100 Figure ..

The technological pessimists generally assume that the phenomenon is non-linear, allowing us insufficient time to adapt. The Second External Limit: The Financial Markets While it is evident that there are externalities when it comes to the environment, this is much less clear in the case of the financial  EXTERNAL LIMI TS OF CAPI TALISM markets. Nevertheless, these also exist and cause serious problems for the market system. We were recently forced to face this fact during the  banking crisis. The system suddenly reached its limits. It stood on the edge of the precipice. If there had been no government to bail out the banks at the time, we might have no market system at all in many countries by now. Particularly since the s, economists have adhered to an idealized image of financial markets, one similar to Adam Smith’s view of the economy in general. When this is applied to financial markets it gives us the following narrative.

After the crash and downturn the system is cleansed. Those who have made the wrong decisions or taken too many risks go under, leaving behind the strong, in a form of social Darwinism. This vision is extremely cynical, yet also naive. It is cynical because there are a great many people among the losers who have not made bad decisions nor run excessive risks, but who are dragged along in the downturn. During the banking crisis of , for example, many good banks were dragged along by the wave of mistrust which arose due to the unprecedented risks taken by a few, including some of the biggest names on the market. They were punished for sins they had not committed. Social Darwinism is in any case a naive vision. After all, the losers, a great many people during a financial crisis, will not just sit idle. They call on the government to limit the damage.


pages: 457 words: 143,967

The Bank That Lived a Little: Barclays in the Age of the Very Free Market by Philip Augar

activist fund / activist shareholder / activist investor, Asian financial crisis, asset-backed security, bank run, banking crisis, Big bang: deregulation of the City of London, Bonfire of the Vanities, bonus culture, break the buck, call centre, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, family office, financial deregulation, financial innovation, fixed income, high net worth, hiring and firing, index card, index fund, interest rate derivative, light touch regulation, loadsamoney, Long Term Capital Management, Martin Wolf, money market fund, moral hazard, Nick Leeson, Northern Rock, offshore financial centre, old-boy network, out of africa, prediction markets, quantitative easing, Ronald Reagan, shareholder value, short selling, Sloane Ranger, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, too big to fail, wikimedia commons, yield curve

Brown, Beyond the Crash, p. 64 11. Hugh Pym, Inside the Banking Crisis: The Untold Story, Bloomsbury Publishing, London, 2014, p. 70 12. Alistair Darling, Back from the Brink: 1000 Days at Number 11, Atlantic Books, London, 2011, p. 145 13. Ibid., p. 146 14. 2005 MOU, http://hm-treasury.gov.uk/6210.htm; Philip Augar, Reckless: The Rise and Fall of the City, Vintage, London, 2010, p. 50 15. Brown, Beyond the Crash, p. 79 16. Ibid., pp. 76–9 17. Pym, Inside the Banking Crisis, p. 97; Darling, Back from the Brink, p. 150 18. Iain Martin, Making it Happen: Fred Goodwin, RBS and the Men Who Blew up the British Economy, Simon & Schuster, London, 2013, p. 30 19. Damian McBride quoted in Pym, Inside the Banking Crisis, p. 109 20. Darling, Back from the Brink, p. 150; Pym, Inside the Banking Crisis, p. 109 21. Andrew Lorenz, BZW: The First Ten Years, BZW, London, 1996, pp. 47–50 22.

Philip Aldrick, ‘Barclays makes the case for universal banking’, Daily Telegraph, 4 August 2009 15. Barclays Annual Report 2009, p. 16 16. Barclays Annual Report 2010, p. 159 17. Barclays Capital Global Financial Services Conference, New York, 15 September 2009, Barclays.com 18. Adair Turner, ‘The Turner review: a regulatory response to the global banking crisis’, Mar 2009, fsa.gov.uk 19. House of Commons Treasury Committee, ‘Banking crisis: reforming corporate governance and pay in the City’, 12 May 2009, p. 3 20. Rachel Sylvester and Katherine Griffiths, ‘Lord Mandelson gets personal over banker’s pay’, The Times, 3 April 2010 21. ‘Lord Mandelson attacks Barclays head’, 3 April 2010, news.bbc.co.uk 22. James Moore, ‘Does Bob Diamond have polish for top job?’, Independent, 7 September 2010 23.

Following these meetings, on Friday 26 he flew to Washington with Vadera to meet President Bush at the White House. The president and the prime minister had built up a good relationship during several meetings and phone calls to discuss the crisis and other matters. That day Brown found Bush in remarkably good spirits, solicitously enquiring about the bandage Vadera was wearing on an injured hand. Brown told Bush that the banking crisis had moved from being a short-term liquidity problem to a more serious issue of long-term solvency and that in his opinion the solution was for governments to take direct equity stakes in the banks. Bush agreed he would raise the matter with Paulson but for now his administration was going down a different route. The previous week the US Treasury had announced its intention to seek congressional approval for a $700 billion fund to buy impaired assets from the banks, the Troubled Assets Relief Program (TARP).


pages: 312 words: 93,836

Barometer of Fear: An Insider's Account of Rogue Trading and the Greatest Banking Scandal in History by Alexis Stenfors

Asian financial crisis, asset-backed security, bank run, banking crisis, Big bang: deregulation of the City of London, bonus culture, capital controls, collapse of Lehman Brothers, credit crunch, Credit Default Swap, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, fixed income, game design, Gordon Gekko, inflation targeting, information asymmetry, interest rate derivative, interest rate swap, London Interbank Offered Rate, loss aversion, mental accounting, millennium bug, Nick Leeson, Northern Rock, oil shock, price stability, profit maximization, regulatory arbitrage, reserve currency, Rubik’s Cube, Snapchat, the market place, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, Y2K

They can become fundamental to how you see the market, and such convictions can stay with you not for days or weeks but for years. They become part of your ‘trading style’ and shape the person you are as a trader. I had several trading styles, certainly, but one of them was that I normally thought that short-term interest rates would go up rather than down. Having been trained in the aftermath of the Scandinavian banking crisis, and then having experienced the Japanese banking crisis, I always had an underlying fear that another banking crisis loomed around the corner. Consequently, I tended to ensure that my long-term trading position took that into account. This view often deviated from the market consensus and was sometimes both irrational and foolish. I did not, of course, predict the global financial crisis. I did, however, ensure that my trading book would generate money should the global financial system tip over into disaster.

I quite liked maths, and went on to study at the Stockholm School of Economics. In that sense, trading was undoubtedly a job where I would be able to make use of my skills, while also having the opportunity to analyse international trends and events on a daily basis. However, when I returned to Sweden to finish my master’s degree in December 1992, there were not many jobs around in finance (or at all, to be honest). Sweden was recovering from a devastating banking crisis and the situation in Finland, my home country, was even worse. The Soviet Union, Finland’s biggest trading partner, had collapsed and a long era of austerity had arrived. Everyone, it seemed, had a hiring freeze, not least the banks, which were either bankrupt, had been nationalised, or were afraid of going bankrupt or being nationalised. The only ad that I found on the noticeboard outside the Student Union matching my educational background was from Midland Montagu.

We, as the tentacle in the Nordic region, would now serve clients not only by quoting prices in bills and bonds, but also in FX and interest rate derivative instruments. Tomas was brought in from Hong Kong to run the dealing room, and extra expertise was flown in from London. A small army of traders and sales people was hired, mostly from Nordbanken, which had been nationalised following the Swedish banking crisis. I became part of the treasury desk, sitting bang in the middle of the trading floor. Surrounded by the bond and FX spot traders and their respective sales forces, our job was to take care of the funding of the operation as well as to trade a range of money market instruments. Uffe and Toby were experienced FX swap traders and took charge of the risk-taking activities, whereas Erik sorted out the funding of the bank.


pages: 280 words: 79,029

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

Affordable Care Act / Obamacare, algorithmic trading, Andrei Shleifer, asset-backed security, availability heuristic, bank run, banking crisis, Black-Scholes formula, bonus culture, break the buck, Bretton Woods, call centre, Carmen Reinhart, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, 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, endogenous growth, 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, information asymmetry, Innovator's Dilemma, interest rate swap, Kenneth Rogoff, Kickstarter, late fees, London Interbank Offered Rate, Long Term Capital Management, longitudinal study, loss aversion, margin call, Mark Zuckerberg, McMansion, money market fund, mortgage debt, mortgage tax deduction, Myron Scholes, negative equity, 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 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, Thales of Miletus, transaction costs, Tunguska event, unbanked and underbanked, underbanked, Vanguard fund, web application

Yet turning back the clock, as well as being impractical, is no answer. The greatest danger often lurks in the most familiar parts of the financial system. Deposits are seen as a “good” source of funding, even though they can be taken out in an instant and get a giant subsidy in the form of deposit insurance. Property is regarded as a bread-and-butter banking activity but is the cause of banking crisis after banking crisis. Secured lending is seen as prudent, even though it can mean decisions are often made on the basis of the collateral being offered (a house, say) rather than the creditworthiness of the borrower (a borrower with no income and no job, say). If you look at the write-downs recorded during the crisis, where were they found? In investment banks, yes, but also in the retail and commercial banks.

See Credit-default swap Cecchetti, Stephen, 79 Church-tower principle, 207 Cigarettes, as means of payment, 5 Clark, Geoffrey Wilson, 144 Clearinghouse, 39 ClearStreet, 210 Clinical drug trials, indemnification of, xii–xiii Coates, John, 116 Code, simplification of, 63 Cohen, Ronald, 91–95, 97, 106, 108, 112 Coins, history of, 4 Collateral, xiv, 7, 38, 65, 76, 150, 177, 185, 204–206, 215 Collateralized-debt obligations (CDOs), 43, 234–235 Collective Health, 104 College graduates, earning power of, 170–171 Commenda, 7–8, 19 Commercial paper, 185 Commodity Futures Trading Commission, 54 CommonBond, 182, 184, 197 Confusion de Confusiónes (de la Vega), 24 Congressional Budget Office, 99, 169 Consumer Financial Protection Bureau overdraft fees and prepaid cards, concern about, 203–204 report on reverse mortgages, 141 survey on payday borrowing, 200 CoRI, 132 Corporate debt, in United States, 120 Corporate finance, 237–238 Correlation risk, 165 Cortisol and testosterone, effect of on risk appetite and aversion, 116 Counterparty risk, 22 Credit, industrialization of, 206 Credit Card Accountability, Responsibility, and Disclosure (Credit CARD) Act of 2009, 203 Credit cards, 203 Credit-default swap (CDS), 37, 64–65, 75, 124, 169, 238 Credit ratings, 24, 120–121, 233–236 Credit-reporting firms, 24 Credit risk, 200, 201, 237, 238 Credit scores, 47–49, 201, 216–217 Creditworthiness, xiv, 10, 12, 47, 121, 197, 202, 204, 216 Crowdcube, 152–155, 158–159, 162 Damelin, Errol, 208 Dark Ages, banking in, 11 Dark pools, 60 DCs (defined-contribution schemes), 129, 131 DE Shaw, 163 Debit cards, 204 Debt, 6, 7, 70, 149, 164 Decumulation, 138–139 Defined-benefit schemes, 129, 131 Defined-contribution (DC) schemes, 129, 131 Dependent variable, 201 Deposit insurance, 13, 43–44 Derivatives, 3, 9–10, 29–32, 38, 40 Desai, Samir, 189 Development-impact bonds, 103 Diabetes, cost of in United States, 102 Dimensional Fund Advisors, 129 Direct lending, 184 Discounting, 19 Disposition effect, 25 Diversification, 8, 12, 20, 117–119, 196, 236 Doorways to Dreams (D2D), 213–214 Dot-com boom, 148 Dow Jones Industrial Average, 40 Dow Jones Transportation Average, 40 Drug development, investment in, vii-viii, 114–115 Drug-development megafund adaptive market hypothesis and, 115–117 Alzheimer’s disease, 122 credit rating, importance of, 120–121 diversification and, 117, 119–120, 122 drug research, improvement of economics of, 114–115 financial engineering, need for, 119 guarantors for, 121 orphan diseases and, 118–119, 122 reactions to, 118 securitization and, 117–119, 122 Dumb money, comparison of to smart money, 155–158 Dun and Bradstreet, 24 Durbin Amendment (2010), 204 Dutch East India Company (VOC), 14–15, 38 E-Mini contracts, 54–55 Eaglewood Capital, 183–184 Ebola outbreak (2014), mortality rate of, 230 Ebrahimi, Rod, 210–211 Ecology, finance and, 113 Economist 2013 conference, xv on railways, 25 on worth of residential property, 70 Educational equity adverse selection in, 174, 175, 182 CareerConcept, 166 differences in funding rates, 176 enforceability, 177 in Germany, 166 Gu, Paul, 172, 175–176 income-share legislation, US Senate and, 172 information asymmetry, 174 Lumni, 165, 168, 175 Oregon, interest in income-share agreements, 172, 176 Pave, 166–168, 173, 175, 182 peer-to-peer insurance, 182 problems with, 167–168, 173–174 providers and recipients, contact between, 160, 175 risk-based pricing model, 176 student loans, 169–171 Upstart, 166–168, 173, 175, 182 Yale University and, 165 Efficient-market hypothesis, 115 Endogeneity, 239 Epidemiology, finance and, 113 Eqecat, 222 Equity, 7–8, 149–150, 186–187 Equity-crowdfunding in Britain, 154 Crowdcube, 152–155, 158–159, 162 Friendsurance, 182–183 Equity-crowdfunding in Britain (continued) herding, 159–160 social insurance, 182–183 Equity-derivatives contracts, 29 Equity-sharing, 7–8 Equity-to-assets ratio, 186 Eren, Selcuk, 73 Eroom’s law, 114 Essex County Council, 95 Eurobond market, 32 European Bank for Reconstruction and Development, 169 Exceedance-probability curve, 231–232, 232 figure 3 Exxon, 169 Facebook, 174 Fair, Bill, 47 False substitutes, 44 Fama, Eugene, 115 Fannie Mae, 48, 78, 85, 168 Farmer, Doyne, 60, 63 Farynor, Thomas, 16 FCIC (Financial Crisis Inquiry Commission), 50 Federal Deposit Insurance Corporation (FDIC), 186, 200 Federal Reserve Bank of New York, 170, 204, 205 Feynman, Richard, 115 Fibonacci (Leonardo of Pisa), 19 FICO score, 47–49 Films to rent, study of hyperbolic discounting, 133–134 Finance bailouts, 35–36 banks, purpose of, 11–14 collective-action problem in, 62 computerization of, 31–32 democratization of, 26–28 economic growth and, 33–34 fresh ideas, need for, xviii, 38–39, 80, 85–86 globalization and, 30, 225 heuristics, use of in, 45–50 illiteracy, financial, 134–135 importance of, 10 information, importance of, 10–11 inherent failings in, 241 misconceptions about, xiii–xvi panic, consequences of, 44 regulatory activity, results of, 33 risk assessment, 24, 45, 77–78 risk management, 55, 117–118, 123 as solution to real-world problems, 114 standardization, 39–41, 45, 47, 51 unconfirmed trades, backlog of, 64–65 use of catastrophe risk modeling in, 233–239 See also High-frequency trading (HFT); Internet Finance, history of bank, derivation of word, 12 Book of Calculation (Fibonacci), 19 call options, 10 Code of Hammurabi, 8 coins, 4 commodity forms of exchange, 4–5 credit and debt, 5–7 in Dark Ages, 11 democratization, 26–28 deposits, 6 derivatives, 29–32, 38 Dutch East India Company (VOC), 14–15, 38 early financial contracts, 5 early forms of finance, 3 equity contracts, 7–8 fire insurance, 16–17 first futures market, 29, 39–40 forward contracts, 38 in Greece, 11 industrialization and, 3, 27–28 inflation-protected bonds, 26 insurance, 8–10, 16–17, 20–22 interest, origin of, 5 in Italy, 9, 14 life annuities, 20–22 maritime trade and, 7–8, 14, 17, 23 payment, forms of, 4–5 put options, 9–10 railways, effect of on, 23–25 in Roman Empire, 7, 8, 11, 36 securities markets, 14 stock exchanges, 14, 24–25 Finance, innovation in absence of, xvi–xvii credit and debt, 5–7 derivatives, 9–10, 29–32 diffusion, pattern of, 45 drivers of, 22–26 equity, 7–8 importance of, 66, 242–243 insurance, 8–9, 16–17, 20–22 lessons from, 32–34 mathematical insights, 18–20 payment, forms of, 4–5 risks of, 145 stock exchanges, 14–16 Finance and the Good Society (Shiller), 242 Financial Crisis Inquiry Commission (FCIC), 50 Financial crisis of 2007–2008 causes of, xv, 34, 69 effects of, xx–xi future of finance, effect on, 243 mortgage debt, role of in, 69–70 new regulations since, 185, 187 Financial Times, quote from Chuck Prince in, 62 Fire insurance, early, 16–17 Fitch Ratings, 24 Flash Boys (Lewis), 57 Flash crash, 54–56, 63 Florida, hurricane damage in, 223, 225 Florida, new residents per day in, 225 Foenus nauticum, 8 Forward contracts, 38 Forward transactions, 15 France collapse of Mississippi scheme in, 36 eighteenth century life annuities in, 20–21 government spending in, 99 Freddie Mac, 48, 85 Fresno, California, social-impact bond pilot program in, 103–104 Friedman, Milton, 165 Friendsurance, 182–183 Fundamental sellers, 54–55 Funding Circle, 181–182, 189, 197 Futures, 29, 39–40 Galton Board, 17, 18 figure 1 Gaussian copula, 235 Geithner, Timothy, 64–65 Genentech, xii General Motors, bailout of, xi Geneva, Switzerland, annuity pools in, 21–22 Gennaioli, Nicola, 42, 44 Ginnie Mae, 168 Girouard, Dave, 166 Glaeser, Edward, 74 Globalization, finance and, 30, 225 Goldman Sachs, 61, 98, 156, 235 Google Trends, 218 Gorlin, Marc, 218 Government spending, rise in, 99–100 Governments, support for new financial products by, 168–169 Grameen Bank, 203 Greece, forerunners of banks in, 11 Greenspan, Alan, 236 Greenspan consensus, 236 Grillo, Baliano, 9 Gu, Paul, 162–164, 166, 172, 175–176 Guardian Maritime, 151 Haldane, Andy, 188 Halley, Edmund, 19–20 Hamilton, Alexander, 35–36 Hammurabi, Code of, 5, 8 Health conditions, SIB early detection programs for, 102–104 Health-impact bonds, 103–104 Hedge funds, 123, 158, 183 Hedging, 30–31, 54, 124, 129, 131, 156, 206, 227 Heiland, Frank, 73 Herding, 24, 159–160 Herengracht Canal properties, Amsterdam, real price level for, 74 Heuristics, 45–50 HFRX, 157–158 High-frequency trading (HFT) benefits of, 58 code, simplification of, 63 flash crash, 54–56 latency, attempts to lower, 53 pre-HFT era, 59–61 problems with, 56–58, 62–63 Hinrikus, Taavet, 190–191 HIV infection rates, SIB program for reduction of, 103 Holland, tulipmania in, 33, 36 Home equity, 139–140 Home-ownership rates, in United States, 85, 170 Homeless people, SIB program for, 96–97 Housing boom of mid-2000s, 148–149 Human capital contracts, 165, 167, 173–174, 176, 177 defined, 6 as illiquid asset, 177 Hurricane Andrew, effect of on insurers, 223–224, 225 Hurricane Hugo, 223 Hyperbolic discounting, 133–134, 211 IBM, 169 If You Don’t Let Us Dream, We Won’t Let You Sleep (drama), 111 IMF (International Monetary Fund), 125–126 Impact investing, 92 Implied volatility, 116 Impure altruism, 109–110 Income-share agreements, 167, 172–178 Independent variables, 201 Index funds, 40 India, CDS deals in, 37 India, social-impact bonds (SIBs) in, 103 Industrialization, effect of on finance, 3, 27–28 Inflation-protected Treasury bills, 131 Information asymmetry, 174 Innovator’s dilemma, 189 Instiglio, 103 Insurance, 8–10, 16–17, 142, 223–225 Insurance-linked securities, 222 Interbank markets, x Interest, origin of, 5 Interest-rate swaps, 29 International Maritime Bureau Piracy Reporting Centre, 151 International Monetary Fund (IMF), 125–126 International Swaps and Derivatives Association (ISDA), 40 Internet, role of in finance creditworthiness, determination of, 172–173, 202, 218 direct connection of suppliers and consumers, xviii, 32 equity crowdfunding, 152–155 income-share agreements, 172–173 ROSCAs, 210 small business loans, 216 speed and ease of borrowing, 189 student loans, 166–167 Intertemporal exchange, 6 Intuit, 218 Investment grade securities, 121 Ireland, banking crisis in, xiv–xv, 69 Isaac, Earl, 47 ISDA (International Swaps and Derivatives Association), 40 ISDA master agreement, 40 Israel, SIBs in, 97 Italy discrimination against female borrowers in, 208 financial liberalization and, 34 first securities markets in, 14 maritime trade partnerships in, 7–8 J. C. Flowers, 69, 81 Japan, banking crisis in, 75 Japan, financial innovation in, 27, 29, 39–40 Jha, Saumitra, 27 Jiménez-Martín, Sergi, 73 Job creation, young small firms and, 147–148 Joint-stock firms, 23 JPMorgan, 77, 169 Jump-to-default risk, 238 Käärmann, Kristo, 190 Kabbage, 218 Kahneman, Daniel, 47, 137 Kanjorski, Paul, 145 Kauffman Foundation, 158 Kennedy, John F., 32 Keys, Benjamin, 48 Kharroubi, Enisse, 79 Kickstarter, 172 King, Stephen, 99 Klein, David, 182 Krugman, Paul, xv Lahoud, Sal, 166 Lang, Luke, 153, 161–162 Laplanche, Renaud, 179, 184, 188, 190, 193–194, 196–197 Latency, 53 Law of large numbers, 17 Layering, 57 Left-digit bias, 46 Lehman Brothers, x, 44, 65 Lending direct, 84 marketplace, 184 payday, 200 relationship-based, 11, 151, 206–208 secured, xiv, 76 unsecured, 206 See also Loans; Peer-to-peer lending Lending Club, 172, 179–180, 182–184, 187, 189, 194–195, 197 Leonardo of Pisa (Fibonacci), 19 Lerner, Josh, 59 Lethal pandemic, risk-modeling for demographic profile, 230 exceedance-probability curve, 231–232, 232 figure 3 historical data, 228–229 infectiousness and virulence, 229–230 location of outbreak, 230–231 Leverage, 51, 70–71, 80, 186, 188 Leverage ratio, 76–77 Lewis, Michael, 57 Liber Abaci or Book of Calculation (Fibonacci), 19 LIBOR (London Interbank Offered Rate), 41 Liebman, Jeffrey, 98 Life expectancy government reaction to, 128–129 projections of, 124–127, 126 figure 2 ratio of young to older people, 127–128 Life-insurance policies, 142 Life-settlements industry, 142–143 Life table, 20 Limited liability, 212 Liquidity, 12–14, 39, 185–186 List, John, 109 The Little Book of Behavioral Investing (Montier), 156 Lo, Andrew, 113–115, 117–123 Loans low-documentation, 48–49 secured, 76 small business, 181, 216 student, 164, 166–167, 169–171, 182 syndicated, 41 Victory Loans, 28 See also Lending; Peer-to-Peer lending Logistic regression, 201 London, early fire insurance in, 16–17 London, Great Fire of, 16 London Interbank Offered Rate (LIBOR), 41 Long-Term Capital Management, 123 Longevity, betting on, 143–144 Loss aversion, 136 Lotteries, 212, 213 Low-documentation loans, 48–49 Lumni, 165, 168, 175 Lustgarten, Anders, 111 Lynn, Jeff, 160–161 Mack, John, 180 Mahwah, New Jersey, 52, 53 Marginal borrowers assessment of, 216–217 behavioral finance and, 208–214 industrialization of credit, 206 microfinance and, 203 savings schemes, 209–214 small businesses, 215–219 unsecured lending to, 206 Wonga, 203, 205, 208 Marginal borrowers (continued) ZestFinance, 199, 202, 205–206 Maritime piracy, solutions to, 151–152 Maritime trade, role of in history of finance, 3, 7–8, 14, 17, 23 Market makers, 15–16, 55 MarketInvoice, 195, 207, 217–218 Marketplace lending, 184 Markowitz, Harry, 118 Massachusetts, use of inflation-protected bonds in, 26 Massachusetts, use of social-impact bonds in, 98 Matching engine, 52 Maturity transformation, 12–13, 187–188, 193 McKinsey & Company, ix, 42 Mercator Advisory Group, 203 Merrill, Charles, 28 Merrill, Douglas, 199, 201 Merrill Lynch, 28 Merton, Robert, 31, 113–114, 123–124, 129–132, 142, 145 Mian, Atif, 204 Michigan, University of, financial survey by, 134–135 Microfinance, 203 Micropayment model, 217 Microwave technology, 53 The Million Adventure, 213–214 Minsky, Hyman, 42 Minsky moment, 42 Mississippi scheme, 36 Mitchell, Justin, 166–167 Momentum Ignition, 57 Monaco, modeling risk of earthquake in, 227 Money, history of, 4–5 Money illusion, 73–74 Money laundering, 192 Money-market funds, 43, 44 Monkeys, Yale University study of loss aversion with, 136 Montier, James, 156–157 Moody, John, 24 Moody’s, 24, 235 Moore’s law, 114 Morgan Stanley, 188 Mortgage-backed securities, 49, 233 Mortgage credit by ZIP code, study of, 204 Mortgage debt, role of in 2007–2008 crisis, 69–70 Mortgage products, unsound, 36–37 Mortgage securitization, 47 Multisystemic therapy, 96 Munnell, Alicia, 129 Naked credit-default swaps, 143 Nature Biotechnology, on drug-development megafunds, 118 “Neglected Risks, Financial Innovation and Financial Fragility” (Gennaioli, Shleifer, and Vishny), 42 Network effects, 181 New York, skyscraper craze in, 74–75 New York City, prisoner-rehabilitation program in, 108 New York Stock Exchange (NYSE), 31, 52, 53, 61, 64 New York Times, Merrill Lynch ad in, 28 Noncorrelated assets, 122 Nonprofits, growth of in United States, 105–106 Northern Rock, x NYMEX, 60 NYSE Euronext, 52 NYSE (New York Stock Exchange), 31, 52, 53, 61, 64 OECD (Organization for Economic Co-operation and Development), 128, 147 Oldfield, Sean, 67–68, 80–84 OnDeck, 216–218 One Service, 94–95, 105, 112 Operating expense ratio, 188–189 Options, 15, 124 Order-to-trade ratios, 63 Oregon, interest in income-share agreements, 172, 176 Organization for Economic Co-operation and Development (OECD), 128, 147 Overtrading, 24 Packard, Norman, 60 Pandit, Vikram, 184 Park, Sun Young, 233 Partnership mortgage, 81 Pasion, 11 Pave, 166–168, 173, 175, 182 Payday lending Consumer Financial Protection Bureau, survey on, 200 information on applicants, acquisition of, 202 underwriting of, 201 PayPal, 219 Peak child, 127 Peak risk, 228 Peer-to-peer lending advantages of, 187–189 auction system, 195 big investors in, 183 borrowers, assessment of, 197 in Britain, 181 commercial mortgages, 181 CommonBond, 182, 184, 197 consumer credit, 181 diversification, 196 explained, 180 Funding Circle, 181–182, 189, 197 investors in, 195 Lending Club, 179–180, 182–184, 187, 189, 194–195, 197 network effects, 181 ordinary savers and, 184 Prosper, 181, 187, 195 RateSetter, 181, 187, 196 Relendex, 181 risk management, 195–197 securitization, 183–184, 196 Peer-to-peer lending (continued) small business loans, 181 SoFi, 184 student loans, 182 Zopa, 181, 187, 188, 195 Pensions, cost of, 125–126 Perry, Rick, 142–143 Peterborough, England, social-impact bond pilot in, 90–92, 94–95, 104–105, 112 Petri, Tom, 172 Pharmaceuticals, decline of investment in, 114–115 Piracy Reporting Centre, International Maritime Bureau, 151 Polese, Kim, 210 Poor, Henry Varnum, 24 “Portfolio Selection” (Markowitz), 118 Prediction Company, 60–61 Preferred shares, 25 Prepaid cards, 203 Present value of cash flows, 19 Prime borrowers, 197 Prince, Chuck, 50–51, 62 Principal-agent problem, 8 Prisoner rehabilitation programs, 90–91, 94–95, 98, 108, 112 Private-equity firms, 69, 85, 91, 105, 107 Projection bias, 72–73 Property banking crises and, xiv, 69 banking mistakes involving, 75–80 behavioral biases and, 72–75 dangerous characteristics of, 70–72 fresh thinking, need for, xvii, 80 investors’ systematic errors in, 74–75 perception of as safe investment, 76, 80 Prosper, 181, 187, 195 Provisioning funds, 187 Put options, 9, 82 Quants, 19, 63, 113 QuickBooks, 218 Quote stuffing, 57 Raffray, André-François, 144 Railways, affect of on finance, 23–25 Randomized control trials (RCTs), 101 Raphoen, Christoffel, 15–16 Raphoen, Jan, 15–16 RateSetter, 181, 187, 196 RCTs (randomized control trials), 101 Ready for Zero, 210–211 Rectangularization, 125, 126 figure 2 Regulation NMS, 61 Reinhart, Carmen, 35 Reinsurance, 224 Relendex, 181 Rentes viagères, 20 Repurchase “repo” transactions, 15, 185 Research-backed obligations, 119 Reserve Primary Fund, 44 Retirement, funding for anchoring effect, 137–138 annuities, 139 auto-enrollment in pension schemes, 135 auto-escalation, 135–136 conventional funding, 127–128 decumulation, 138–139 government reaction to increased longevity, 128–129 home equity, 139–140 life expectancy, projections of, 124–127, 126 figure 2 life insurance policies, cash-surrender value of, 142 personal retirement savings, 128–129, 132–133 replacement rate, 125 reverse mortgage, 140–142 savings cues, experiment with, 137 SmartNest, 129–131 Reverse mortgages, 140–142 Risk-adjusted returns, 118 Risk appetite, 116 Risk assessment, 24, 45, 77–78, 208 Risk aversion, 116, 215 Risk-based capital, 77 Risk-based pricing model, 176 Risk management, 55, 117–118, 123, 195–197 Risk Management Solutions, 222 Risk sharing, 8, 82 Risk-transfer instrument, 226 Risk weights, 77–78 Rogoff, Kenneth, 35 “The Role of Government in Education” (Friedman), 165 Roman Empire business corporation in, 7 financial crisis in, 36 forerunners of banks in, 11 maritime insurance in, 8 Rotating Savings and Credit Associations (ROSCAs), 209–210 Roulette wheel, use of in experiment on anchoring, 138 Royal Bank of Scotland, 186 Rubio, Marco, 172 Russia, mortgage market in, 67 S-curve, in diffusion of innovations, 45 Salmon, Felix, 155 Samurai bonds, 27 Satsuma Rebellion (1877), 27 Sauter, George, 58 Save to Win, 214 Savings-and-loan crisis in US (1990s), 30 Savings cues, experiment with, 137 Scared Straight social program, 101 Scholes, Myron, 31, 123–124 Science, Technology, and Industry Scoreboard of OECD, 147 Securities and Exchange Commission (SEC), 54, 56, 57, 58, 64 Securities markets, 14 Securitization, xi, 20, 37–38, 117–122, 183–184, 196, 236 Seedrs, 160–161 Sellaband, 159 Shared equity, 80–84 Shared-equity mortgage, 84 Shepard, Chris, xii–xiii Shiller, Robert, xv–xvi, 242 Shleifer, Andrei, 42, 44 Short termism, 58 SIBs.

But anyone who seeks to defend the industry must also recognize how often, and how badly, it goes wrong. In This Time Is Different, their excellent survey of debt crises across the centuries, Carmen Reinhart and Kenneth Rogoff analyze episodes of banking crises. Such meltdowns are depressingly common in both developed and emerging economies: Britain, America, and France have experienced twelve, thirteen, and fifteen episodes of banking crisis, respectively, since 1800, for example.1 The first bailout in the United States happened way back in 1792, when a bubble and then a slump in the price of the country’s federal debt helped spark widespread panic. Alexander Hamilton, America’s first treasury secretary, was desperate to prevent severe damage to the country’s nascent financial system. He responded by, among other things, buying up government debt in order to prop up its price and protect the banks that owned it and by channeling cash to lenders that needed it.


pages: 700 words: 201,953

The Social Life of Money by Nigel Dodd

accounting loophole / creative accounting, bank run, banking crisis, banks create money, Bernie Madoff, bitcoin, blockchain, borderless world, Bretton Woods, BRICs, business cycle, capital controls, cashless society, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computer age, conceptual framework, credit crunch, cross-subsidies, David Graeber, debt deflation, dematerialisation, disintermediation, eurozone crisis, fiat currency, financial exclusion, 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, Kickstarter, Kula ring, laissez-faire capitalism, land reform, late capitalism, liberal capitalism, liquidity trap, litecoin, London Interbank Offered Rate, M-Pesa, Marshall McLuhan, means of production, mental accounting, microcredit, mobile money, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, negative equity, new economy, Nixon shock, Occupy movement, offshore financial centre, paradox of thrift, payday loans, Peace of Westphalia, peer-to-peer, 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, Veblen good, Wave and Pay, Westphalian system, WikiLeaks, Wolfgang Streeck, yield curve, zero-coupon bond

Private borrowing is affected too: Krugman envisages a crisis emerging specifically because firms have a high proportion of their debt in foreign currency (Krugman 2002), and Robert Wade’s analysis of the Icelandic crisis suggests that large borrowings by households and firms in foreign currency were crucial (Wade 2009). It is simply less risky for a government to borrow in its own currency. In the aftermath of the 2007–8 banking crisis, many states ran into debt problems, not just because of the costs of bailout but also (and mainly) because of the recession that was triggered by the credit squeeze the banking crisis caused. States fund their debt through taxation (but revenues are in decline) and bonds (which have been downgraded in many cases), and central banks (especially in the United States and the United Kingdom) have been purchasing bonds to sustain the market. For countries borrowing in their own currency (irrespective of whether their creditors are domestic or foreign), there are two options for dealing with rising borrowing costs.

Faced with these realities, it is little wonder that a war has been declared on the banking system through political protests that have embraced as wide a spectrum of society as the original crisis itself. The political rhetoric is not simply about unequal wealth and income distribution. At a more fundamental level, and in a more precise way, it attacks the financial system that is responsible for perpetuating it. Of course, just calling this a banking crisis is too narrow a description. And to speak of banks as if they were all the same—to wit, part of an overarching Wall Street system—glosses over the complexity of financial institutions that do not operate in unison and are fragmented within themselves. Indeed, one could argue that divisions within banks, and their fragmented epistemic cultures, played a significant role in bringing the crisis about (MacKenzie 2011).

Since the early 1990s, however—and especially since the crisis—there has been a genuine surge of interest in the changing nature of money, partly because of the emergence of new forms such as local currencies and digital monies. Whereas the financial crisis appears to have fueled the enthusiasm of wider publics for new forms of money and credit, it has also underlined the argument that the role of states and banks in money’s social production may be undergoing a fundamental transformation. As the Cypriot banking crisis erupted during the early months of 2013, the value of Bitcoins (a currency that severs links with both the state and the banking system) rose sharply against both the euro and the U.S. dollar. There are many possible explanations for this, not least that we were simply witnessing a bubble. But the debates that have sprung up around the Bitcoin phenomenon are revealing because most of them are focused on the possibilities of developing a serious rival to state currency.


pages: 405 words: 109,114

Unfinished Business by Tamim Bayoumi

algorithmic trading, Asian financial crisis, bank run, banking crisis, Basel III, battle of ideas, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, buy and hold, capital controls, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, currency manipulation / currency intervention, currency peg, Doha Development Round, facts on the ground, Fall of the Berlin Wall, financial deregulation, floating exchange rates, full employment, hiring and firing, housing crisis, inflation targeting, Just-in-time delivery, Kenneth Rogoff, liberal capitalism, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, market bubble, Martin Wolf, moral hazard, oil shale / tar sands, oil shock, price stability, prisoner's dilemma, profit maximization, quantitative easing, race to the bottom, random walk, reserve currency, Robert Shiller, Robert Shiller, Rubik’s Cube, savings glut, technology bubble, The Great Moderation, The Myth of the Rational Market, the payments system, The Wisdom of Crowds, too big to fail, trade liberalization, transaction costs, value at risk

The mega-banks in the Euro area core continued to expand, providing much of the funding for the housing price bubbles in the United States and financial bubbles in the Euro area periphery. When the bubbles burst the losses whipsawed back onto the core of the Euro area, widening the banking crisis across the North Atlantic. Indeed, every banking system in the Euro area experienced a crisis in 2008 except for Finland.1 The northern European mega-banks were thus major protagonists that helped drive the North Atlantic banking crisis rather than hapless victims, as they are often portrayed. How the northern European banks were allowed to expand so far, so fast, is a cautionary tale of unanticipated spillovers from financial regulations. Three decisions, directed at differing goals and taken by distinct groups, created the environment for the mega-banks to thrive.

IKB was a small German bank specializing in loans to medium-size enterprises that was brought down by unwise investments in assets backed by subprime loans. In many ways, IKB was the more important financial shock. Jochen Sanio, the lead German bank regulator, is reported to have said that the hurried weekend rescue involving a wide swathe of the German banking industry (an arrangement designed to circumvent EU rules on state subsidies) was needed to avoid the worst banking crisis since 1931.1 However, the symbolism of having part of the business of the largest French bank felled by turmoil in US markets has remained the more potent talisman of the wider impact of the North Atlantic crisis, a somewhat ironic outcome as BNP Paribas actually weathered the crisis relatively successfully. The financial chill that settled over Europe in the summer of 2007 has yet to be fully lifted.

This rapid overseas expansion provided significant parts of the funding for the US and periphery financial bubbles, and ensured that the subsequent busts fed back to the core Euro area banking systems despite limited housing excesses at home. In 2007, on the eve of the US subprime problems, the northern European banks (Euro area core plus UK) owned US assets worth over one-quarter of US output, three times the ratio of 2000. By this time, they also owned assets in the Euro area periphery of around half of the periphery output, double the 2000 value. The result was that when the bubble burst the Euro area suffered a generalized banking crisis. The twelve mega-banks identified in Chapter 1 (see Figure 3) drove these shifts in the Euro area banking system.32 Indeed, they accounted for the entire increase in bank assets over the 2000s as they expanded from one-third to one-half of the assets of the overall system through a combination of internal expansion, and mergers and acquisitions (Figure 23). By 2008, Deutsche Bank had assets of over 20 percentage points of Euro area output and six other mega-banks had balance sheets greater than 10 percentage points, a threshold than no bank had surpassed in 2000.


pages: 394 words: 85,734

The Global Minotaur by Yanis Varoufakis, Paul Mason

active measures, banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, business climate, business cycle, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, colonial rule, corporate governance, correlation coefficient, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, declining real wages, deindustrialization, endogenous growth, eurozone crisis, financial innovation, first-past-the-post, full employment, Hyman Minsky, industrial robot, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, labour market flexibility, light touch regulation, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, market fundamentalism, Mexican peso crisis / tequila crisis, money market fund, mortgage debt, Myron Scholes, negative equity, new economy, Northern Rock, paper trading, Paul Samuelson, planetary scale, post-oil, price stability, quantitative easing, reserve currency, rising living standards, Ronald Reagan, special economic zone, Steve Jobs, structural adjustment programs, systematic trading, too big to fail, trickle-down economics, urban renewal, War on Poverty, WikiLeaks, Yom Kippur War

If I am right, and the euro crisis is a systemic failure that began as a banking crisis, then Europe’s medicine is worse than the disease. It is like sending a weak swimmer out to sea to save a drowning bather: all you can expect is the sad sight of the two weak swimmers hanging onto one another for dear life, both sinking fast to the bottom of the sea. The two swimmers are, of course, the eurozone’s deficit states and Europe’s banking system. Overburdened as the banks are with almost worthless paper debts issued by states like Greece and Ireland, they constitute black holes into which the ECB keeps pumping oceans of liquidity, which of course only yields a tiny trickle of extra loans to business. Meanwhile, the ECB, the surplus countries and the IMF steadfastly refuse to discuss the banking crisis, concentrating their energies solely on imposing massive austerity on the deficit states.

When customers suspect this, they try to withdraw their money, at which point the bank collapses, before being brought back to ‘life’ by the Bank of England at a cost in excess of £15 billion. Rocked by this development, Bernanke drops US interest rates by another small amount, to 4.75 per cent, while the Bank of England pumps £10 billion worth of liquidity into the City of London. October – The banking crisis extends to the most esteemed Swiss financial institution, UBS, and the world takes notice. UBS announces the resignation of its chairman and CEO, who takes the blame for a loss of $3.4 billion from CDOs containing US sub-prime mortgages. Meanwhile, in the United States, Citigroup at first reveals a loss of $3.1 billion (again on mortgage-backed CDOs) – a figure that rises by another $5.9 billion within a few days.

The second difference relates to the eurozone’s problematic architecture, and especially the way that, though its member states are bound by a common currency, their public debts are strictly separate, banks are the responsibility of member states alone, and there is no surplus recycling mechanism to prevent structural fault lines from developing. To put it simply, imagine what would have happened in 2008 if, in the ‘dollar-zone’, each state (e.g. California or Nevada) had to bail out the banks registered on its soil and there was no way of financing public deficits from Washington! Within this institutionally problematic framework, the ECB and the European Commission struggled to contain the banking crisis. Between 2008 and 2009, they ‘socialized’ the banks’ losses and turned them into public debt. Meanwhile, the economy of Europe went into recession, as expected. In one year (2008–09) Germany’s GDP fell by 5 per cent, France’s by 2.6 per cent, Holland’s by 4 per cent, Sweden’s by 5.2 per cent, Ireland’s by 7.1 per cent, Finland’s by 7.8 per cent, Denmark’s by 4.9 per cent and Spain’s by 3.5 per cent.


pages: 248 words: 57,419

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

asset-backed security, bank run, banking crisis, banks create money, Ben Bernanke: helicopter money, Bretton Woods, business cycle, 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, mass immigration, Mexican peso crisis / tequila crisis, money market fund, 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

The resulting glut of Chinese goods would cause a collapse in their product prices, lead to a wave of business failures, and put an end to new investment. Corporate distress would result in a systemic banking crisis. Unemployment would soar. China’s economy would quickly collapse into severe depression. China’s imports would contract in line with its exports. The boost that Chinese demand had given to global commodity prices would end. The commodity-producing countries such as Brazil, Australia, Thailand, and Indonesia would be hard hit, as would be countries such as Germany, Japan, and Korea, which had supplied China with higher valued-added products. International finance could not survive the strain of contracting global trade, plunging commodity prices, falling corporate profits, and the bankruptcies those developments would cause. A systemic banking crisis would be the inevitable outcome. Here, then, would be a complete replay of the Great Depression: mass joblessness, extensive credit destruction, and a collapse in international trade.

Global Imbalances: Still Unresolved Vision and Leadership Are Still Lacking Notes Chapter 7: How It Plays Out The Business Cycle Debt: Public and Private 2011: The Starting Point 2012: Expect QE3 Impact on Asset Prices 2013–2014: Three Scenarios Impact on Asset Prices Conclusion Notes Chapter 8: Disaster Scenarios The Last Great Depression And This Time? Banking Crisis Protectionism Geopolitical Consequences Conclusion Note Chapter 9: The Policy Options Capitalism and the Laissez-Faire Method The State of Government Finances The Government’s Options American Solar Conclusion Notes Chapter 10: Fire and Ice, Inflation and Deflation Fire Ice Fisher’s Theory of Debt-Deflation Winners and Losers Ice Storm Fire Storm Wealth Preservation through Diversification Other Observations Concerning Asset Prices in the Age of Paper Money Protectionism and Inflation Consequences of Regulating Derivatives Conclusion Notes Conclusion About the Author Index Copyright © 2012 Richard Duncan.

The economy grew, but it grew in an unhealthy and unsustainable manner. Asset price bubbles formed and reshaped the structure of the economy. The NASDAQ bubble misallocated credit into the telecommunications and Internet sectors. When it popped, the Fed orchestrated the property bubble, which misallocated even more credit into housing. When the subprime loans could not be repaid, the losses produced a systemic banking crisis and forced the effective nationalization of Fannie Mae and Freddie Mac. Next, Bernanke cut interest rates to zero (see Exhibit 5.2), but that was not enough. It was no longer just a matter of ensuring that credit continued to expand. The credit market was imploding under the losses on defaulting and non-performing assets. Credit began to contract and the economy plunged into crisis. At that point the Fed had only one tool left, the printing press.


pages: 225 words: 11,355

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

asset-backed security, bank run, banking crisis, Bernie Madoff, bonus culture, Bretton Woods, business cycle, 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, George Santayana, global reserve currency, Home mortgage interest deduction, Isaac Newton, joint-stock company, Kickstarter, liquidity trap, London Interbank Offered Rate, long peace, margin call, market clearing, mass immigration, money market fund, 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 new new thing, the payments system, too big to fail, value at risk, very high income, War on Poverty, Y2K, yield curve

You could see and touch these investments. Real history shows that real estate lending is in fact about as risky a thing as you can do with other people’s money. It has been the largest single cause of financial crises over the last forty years, from the U.S. banking crisis of 1974, triggered by collapsing real estate investment trusts, the collapse of the U.S. savings and loan industry in the 1980s, the collapse of the Japanese bubble economy in 1990, the Swedish and Finnish banking crises of the same period, and the Asian banking crisis of 1997. The only response to this inconvenient fact that the U.S. Congress seems capable of is to throw money at the collapsing U.S. housing market instead of simply letting the market clear at prices that attract buyers who can actually afford a house. To protect distressed homeowners, our political masters have felt quite free to violate centuries of contract law and property rights essential to a functioning market economy.

Thus far, this is a classic bubble, if a very big one, even for the world’s second largest economy. Japan’s world-beating companies were still selling their products to Europeans and Americans. Japan remained basically a rich country. The problem was there was no Dr. House at the MOF, at least not one to whom anyone would listen. Japan spent the years after the bubble burst in 1990 making a banking crisis into an economic catastrophe. At the time, American bankers, government officials, academics, and other experts told the Japanese they were doing all the wrong things and offered them alternatives. These mainly involved free market solutions for clearing the markets. Today, we appear hell bent on replicating Japan’s mistakes on a vastly larger scale. The obvious need in classic Bagehot terms is to restore confidence in the banking system.

If there was a general collapse of the banking system, something that has happened before in other countries like Mexico and Russia and partially happened here in 1930 to 1933, we the taxpayers would be on the hook for at least $4 trillion to give us back our own deposit money. This wouldn’t happen. Four trillion dollars is larger than the What Should Be Done? federal blow-out budget for 2009 and nearly a third of U.S. national income. The government simply doesn’t have and probably couldn’t get its hands on that kind of money should the current banking crisis go into free fall. The collapse of the payments system based on deposit money would mean no company could pay its bills or its meet payroll. Investors would be wiped out. All our paper wealth and savings would simply evaporate. We would revert to the cash, barter, and private bill of exchange economy that preceded all the real history in Chapter Four. We wouldn’t like it, though we might feel that we had gotten even with the greedy bankers.


pages: 267 words: 74,296

Unhappy Union: How the Euro Crisis - and Europe - Can Be Fixed by John Peet, Anton La Guardia, The Economist

bank run, banking crisis, Berlin Wall, Bretton Woods, business cycle, 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, fixed income, Flash crash, illegal immigration, labour market flexibility, labour mobility, light touch regulation, 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

, Centre for European Policy Studies, 2006, available at: www.ceps.be/ceps/dld/3059/pdf 3Tilford, S., Will the Eurozone Crack?, Centre for European Reform, September 2006, available at: www.cer.org.uk/sites/default/files/publications/attachments/pdf/2011/p_688_eurozone_crack_42-892.pdf 4Veron, N., Is Europe Ready for a Major Banking Crisis?, Bruegel, August 2007, available at: www.bruegel.org/download/parent/234-is-europe-ready-for-a-major-banking-crisis/file/659-is-europe-ready-for-a-major-banking-crisis-english/ 5EMU@10: Successes and challenges after ten years of Economic and Monetary Union, European Commission, available at: ec.europa.eu/economy_finance/publications/publication12682_en.pdf 6Delors, J., Report on economic and monetary union in the European Community, April 1989, available at: ec.europa.eu/economy_finance/publications/publication6161_en.pdf 5 Trichet’s test 1Article 125: “A Member State shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of another Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project.” 2Article 122.2: “Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council, on a proposal from the Commission, may grant, under certain conditions, Union financial assistance to the Member State concerned.

Cross-border ownership was most apparent in the EU’s new members from central and eastern Europe. Among members of “old” Europe it remained for the most part tiny. But by late 2007, partly as a result of the Commission’s efforts to chip away at internal barriers, there was enough cross-border expansion to prompt at least one economist, Nicolas Véron, to publish a paper for the Bruegel think-tank in Brussels titled: Is Europe Ready for a Major Banking Crisis?4 He noted that banks had become too large and diversified for national supervisors, even if they met in the then Committee of European Banking Supervisors (CEBS), to oversee properly. He said: The prudential framework for pan-European banks has become a maze of national authorities (51 are members of CEBS alone), EU-level committees (no fewer than nine) and bilateral arrangements (some 80 recently mentioned by European Commissioner Charlie McCreevy).

The deal would prompt ratings agencies to declare a temporary “selective default” (the EFSF would have to offer the ECB alternative collateral), but its voluntary nature ensured it would not count as a “credit event” that triggered payments of credit-default swaps, a form of insurance against sovereign defaults. However, the deal proved to be the worst of both worlds: the haircut was too small to turn around Greece’s public finances, but big enough to spread fear that other bonds were at risk. Markets had other reasons to worry. The original banking crisis had never been satisfactorily resolved; it had only been masked by the Greek turmoil and, to a great extent, worsened by the sovereign-debt crisis. The second round of bank stress tests in July turned out to be another half-baked job. Plainly, sovereign bonds could no longer be treated as risk-free. But only the bonds in banks’ trading books were accounted for at market value; those in the banking books were counted at face value because they would supposedly be held to maturity.


pages: 367 words: 108,689

Broke: How to Survive the Middle Class Crisis by David Boyle

anti-communist, banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Bonfire of the Vanities, bonus culture, call centre, collateralized debt obligation, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, deindustrialization, delayed gratification, Desert Island Discs, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, financial deregulation, financial independence, financial innovation, financial intermediation, Francis Fukuyama: the end of history, Frederick Winslow Taylor, housing crisis, income inequality, Jane Jacobs, job satisfaction, Kickstarter, knowledge economy, knowledge worker, market fundamentalism, Martin Wolf, mega-rich, mortgage debt, Neil Kinnock, Nelson Mandela, new economy, Nick Leeson, North Sea oil, Northern Rock, Occupy movement, off grid, offshore financial centre, pension reform, pensions crisis, Plutonomy: Buying Luxury, Explaining Global Imbalances, Ponzi scheme, positional goods, precariat, quantitative easing, school choice, Slavoj Žižek, social intelligence, too big to fail, trickle-down economics, Vanguard fund, Walter Mischel, wealth creators, Winter of Discontent, working poor

‘I never thought we would be struggling in the way that we are, for every little thing. We do get to do some of the nice things, but not without some kind of anguish. I have to get my loyalty schemes and it goes down each time. We can no longer afford to go away. Our main summer holiday is five days in Majorca in the half-term, when the prices are lower [than in summer itself].’ Of course, a great deal of Deborah’s angst is bound up with the banking crisis and the recession that has followed. She agrees that she still leads a ‘privileged life’. But there is something about her predicament which is recognizable to the nation’s supposedly affluent classes, and exactly the same mixture of frustrated aspirations and threatened values is shared a good deal more widely. ‘Just trying to keep where we are, and downshifting a tiny bit; that’s what we’re aspiring to,’ she says.

‘We are stuck,’ one human resources manager told the Guardian newspaper in 2011. ‘At the end of the month, what with rent and extortionate costs of travel, we have nothing left. In fact, less than nothing, which is a bit of a shocker.’[6] Shona Sibary used the same word describing the plight of her family when they had their home repossessed. As Deborah Lane implied, this feeling of being ‘stuck’ emerged before the banking crisis and the downturn. When the Department of Work and Pensions began investigating the so-called ‘squeezed middle’ in 2006, it found that — even then — a quarter of middle-income earners could not afford a week’s family holiday. Six per cent of them couldn’t afford to send children swimming once a month. According to the TUC, the same proportion of middle-income people were worried about their jobs as were the very lowest earners.

Now, viewed with hindsight, the Lloyd’s Scandal looks like a curtain-raiser for the banking scandal — the same refusal to provide proper regulation, the same scramble to cover things up, and to provide immunity for the financial community rather than to protect vulnerable people. ‘The legal system let us down badly,’ says Stockwell now. ‘I understand why. I understand their need for the legal system to give some kind of finality. I understand the need to protect the Lloyd’s market so that it could get back on its feet. But nevertheless, allowing the establishment to cover up was what made the banking crisis possible.’ Here is the conundrum of the story, and the paradox for the middle classes today. They believe the great financial institutions are on their side, believe they understand the way the world works, pride themselves even on their ability to navigate through it — they had welcomed the deregulation of financial services and all the other changes since the 1980s. But they have been horribly deluded.


pages: 488 words: 144,145

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

Albert Einstein, bank run, banking crisis, Black Swan, Bretton Woods, British Empire, business cycle, buy and hold, California gold rush, Carmen Reinhart, central bank independence, commoditize, conceptual framework, corporate governance, corporate raider, creative destruction, 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, Paul Samuelson, 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

New York, which held out almost a month after the bank crisis began in Michigan, declared a bank holiday on the morning of Inauguration Day. Terrified citizens were lined up outside New York banks as the new president took his oath of office. Ten days after FDR’s inauguration, he ordered an extended bank holiday. Even as the stronger banks in the nation gradually were allowed to re-open, the banks in Detroit remained closed. Almost a million individuals and businesses in Michigan were cut off from their funds for over a month and the larger depositors of the banks—including Henry Ford—were compelled to wait for the liquidation of the insolvent banks. Jesse Jones, the legendary chairman of the Reconstruction Finance Corporation under FDR, laid the blame for exacerbating the Banking Crisis of 1933 at the feet of Ford and Couzens: Detroit’s banking collapse may have been inevitable, the situation in the sorely stricken automobile industry being what it was, and the laws being what there were at the time; but the circumstances would have been less painful, the personal tragedies fewer, had not insurmountable difficulties been created by personal, industrial, and political hostilities at almost every step of our approach to the problem in February 1933.56 Malcolm Bingay, editor of the Detroit Free Press, interviewed Couzens several times following the crisis of 1933.

The Democrats actually controlled Congress during Hoover’s presidency, so they cannot escape a fair share of responsibility for not foreseeing the catastrophe. FDR and the Democrats clearly worsened the banking crisis in 1932 by refusing to cooperate with the incumbent Hoover during the long transition period from November to March. The handoff of power between Hoover and FDR in March 1933 was painful, culminating with the oath of office as most of the nation’s banks stood closed. The transition in 1933 provided an especially fateful example of why the period of time from the election of a president to inauguration had to be shortened by the Twentieth Amendment to the Constitution that same year. Hoover believed that FDR deliberately chose not to cooperate openly with his government to contain the banking crisis in 1932 and thereby use the larger emergency as a pretext for imposing authoritarian controls over American business and labor.

So pressing was the emergency and so short the time that the Bureau printed dollars with old plates that bore the legend “Series of 1929” and used old signatures from the 12 Federal Reserve Banks. By Saturday, March 11th, planes filled with newly printed dollars began to leave Washington to deliver badly needed funds to banks around the country. While the emergency was far from over, the closure of the banks and the rapid distribution of new cash around the country enabled FDR to slow the deflationary aspect of the banking crisis and buy some time to formulate the next steps to be taken. FDR’s abandonment of the gold standard and confiscation of gold coins in 1933 was among the most memorable actions taken by FDR when it comes to money and debt. FDR’s decision to take the United States off the gold standard and devalue the dollar had a far more profound impact on the country and the world than many of the dozens of other programs that were put in place during the period.


pages: 98 words: 27,201

Are Chief Executives Overpaid? by Deborah Hargreaves

banking crisis, Big bang: deregulation of the City of London, bonus culture, business climate, corporate governance, Donald Trump, G4S, Jeff Bezos, loadsamoney, Mark Zuckerberg, Martin Wolf, performance metric, principal–agent problem, profit maximization, Ronald Reagan, shareholder value, Snapchat, trade liberalization, trickle-down economics, wealth creators

It led many brokerages and investing institutions to take more risks with their money in pursuit of high gains. However, when the stock market fall came, it turned out that this so-called portfolio insurance not only did not protect their investments from losses, but actually exacerbated the decline. I was to witness this exuberance and neglect of the dangers in the build-up to many more market downfalls – right up to the banking crisis of 2008. Greed has become one of the driving forces for many in our executive class, trumping long-term considerations about the future of their companies and the workforce, even overcoming fears about the fragility of capitalism itself. When there is the opportunity of enriching yourself to the extent that you and your family need never work again, who would not avail themselves of the option?

Mr Walker’s words were prescient as the corporate sector is now so distrusted and discredited over pay and other scandals that people tend not to believe businesspeople when they talk about important policy issues. So, for example, when business warned about the dangers of Brexit, they were ignored. And tellingly, when government called on retailers to warn about rising prices as a result of Scottish independence during the referendum in 2015, they were actively ridiculed. Trust in business plumbs the depths Trust in business has imploded since the banking crisis of 2008, according to Edelman, the public relations company, which has been mapping it for 18 years with its Trust Barometer.14 In recent years it has reported a crisis of trust around the world in business leaders, as well as politicians, media and non-governmental organizations. The Barometer has picked up unease among people all over the world who feel the system is biased against them and in favour of the rich and powerful.

At the same time, income is taxed at twice the rate of capital gains, which is a more significant levy for many with large investments. This means the rich have thrived in the decade since the financial crisis. In the US, the top 1 per cent have seen their income grow twenty-five times more than the rest of the population since 2008 – taking some 85 per cent of the increase in income during that decade. In the UK, those households with income of £275,000 or more had quickly recovered from the slump brought on by the banking crisis, and their share of national income had returned to the level of pre-2007, according to research by the Resolution Foundation. But the other 99 per cent of UK households have not fared so well, with low- to middle-income households seeing their income fall. Another part of the debate on taxes is the need to close loopholes that enable the wealthy and big corporations to shelter their income in offshore jurisdictions.


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

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, Boris Johnson, Bretton Woods, BRICs, British Empire, business cycle, 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, creative destruction, credit crunch, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency peg, debt deflation, Diane Coyle, disruptive innovation, 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, Intergovernmental Panel on Climate Change (IPCC), Irish property bubble, James Dyson, Jane Jacobs, job satisfaction, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, 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, peer-to-peer rental, 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

Code: namq_gdp_k Denmark has struggled with its own banking crisis. Iceland remains deeply scarred from its huge financial bubble, which I described at length in Aftershock. 388 One bank let a firm selling yachts grant loans on its behalf. The firm could even grant loans to new customers on weekends when it was impossible to control their creditworthiness. Unsurprisingly, both the firm and bank soon went out of business, the latter by merging with a large commercial bank that was rescued by the government in 1991. See Erling Steigum, "Financial Deregulation with a Fixed Exchange Rate: Lessons from Norway’s Boom-Bust Cycle and Banking Crisis", 2003. http://www.norges-bank.no/Upload/import/publikasjoner/skriftserie/33/chapter2.pdf 389 The banking crisis started in the late 1980s in Norway and in the early 1990s in Finland and Sweden. 390 They extended loans worth 20 per cent of Swedish GDP, pumping up local housing bubbles, with Swedbank and SEB in particular taking big risks. http://www.economonitor.com/analysts/2009/06/24/swedish-banks-could-they-get-burned-by-heavy-baltic-exposure/ 391 Personal calculations from Office for National Statistics, net financial liabilities of households and non-profit institutions serving households (code: AF.L) divided by four-quarter moving sum of their gross disposable income (code: RPHQ).

The lesson from Lehman was not that governments must save all banks, but rather that failed banks should be restructured or killed off in an orderly way rather than a chaotic one. In the absence of legal mechanisms for winding down banks in an orderly fashion, insolvent banks should either have been nationalised, restructured and recapitalised before being sold off again (as Norway did during its banking crisis in the early 1990s) or new “good banks” created and the old “bad banks” wound down, as I argued in Aftershock.68 Either option – nationalisation or the creation of new good banks – would have been infinitely preferable to the current mess. It would have boosted the economy, because the freshly capitalised good banks, unburdened by the old bad loans and securities, could have quickly resumed their proper function of lending to sound companies.

The component parts might muddle along in an imperfect currency union (as in Britain, where little is done to tackle the north-south divide) or there might be efforts to remedy its deficiencies (as there are in the eurozone, as we shall see). In short, the euro itself did not cause the financial excesses in the pre-crisis years, which occurred across the Western financial system. Indeed, in Act One of the crisis, after the bubble burst, it acted as a shock absorber. Nor has the euro prevented its member economies from adjusting. While it might fail, it is not destined to. Last but not least, the vicious interaction between a banking crisis and a bond-market panic that tore the eurozone apart between 2010 and 2012 was largely due to avoidable policy mistakes in Frankfurt, Brussels and Berlin, as we shall see. What really went wrong It was only in Act Two of the crisis after the bailout of Greece’s creditors in 2010 and even more so in Act Three after the summer of 2011 that the euro became an unstable system that amplified shocks rather than damping them.


pages: 393 words: 115,263

Planet Ponzi by Mitch Feierstein

Affordable Care Act / Obamacare, Albert Einstein, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Bernie Madoff, break the buck, centre right, collapse of Lehman Brothers, collateralized debt obligation, commoditize, 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, fixed income, Flash crash, floating exchange rates, frictionless, frictionless market, high net worth, High speed trading, illegal immigration, income inequality, interest rate swap, invention of agriculture, light touch regulation, Long Term Capital Management, low earth orbit, mega-rich, money market fund, moral hazard, mortgage debt, negative equity, 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

(It managed to lose £10 billion in a single year.24) There may well, in other words, be a large European bank, or several large European banks, that are even now sliding toward the waterfall, utterly oblivious of what’s about to happen. And if one large bank goes over the edge, there are countless more in danger of following. When and if the banks start to collapse, the fiscal consequences for governments will be horrendous, no matter how prudent they seek to be. A European banking crisis will therefore also be a European sovereign debt crisis‌—‌which in turn will make the banking crisis even worse. * This survey won’t have cheered up too many readers. It’s also raised countless questions. What about Germany? What about the current European bailout fund, the EFSF? What about the euro‌—‌can the European currency even survive? Those are big questions. Too big and too important for this chapter. 17 The aureus and the as For five hundred years around the birth of Christ, Europe had a single currency.

The origins of that scheme go way back‌—‌at least three decades, if you think only of Wall Street, but arguably as much as sixty years if you think of the federal government. Naturally, I’m aware that my claim sounds implausible, but I hope it doesn’t strike readers as entirely implausible. After all, just a few years ago in 2008–9, part of the Ponzi scheme was laid bare for all to see in the shape of the subprime mortgage bust and the consequent banking crisis. That crisis was already the largest Ponzi scheme in history, so the track record is there. As for what’s happening today, this book will attempt a patient accounting of the scheme, its debts, its losses, its strategies of concealment. In particular, we’ll find ourselves, again and again, running across the following ingredients, key to any Ponzi scheme: exponentially increasing liabilities‌—‌or, in plain English, rapidly mounting debt; crappy, nonexistent, or inadequate assets; deceitful or nonexistent accounting; feeble, inert, or toothless regulators; a get-rich-quick culture, for preference salted with a whole array of inappropriate incentives; stupid, ignorant, lazy investors‌—‌the greedier, the better; and an astonishing capacity for self-delusion.

Build in the United States and face a huge healthcare bill? Or build elsewhere and let the government take care of those costs? For many companies, the answer will be obvious. And there’s part of the explanation for the US’s current high levels of joblessness and underemployment. That was the background in 2008 when President Obama swept into power with a mandate for change. He had the inbox from hell already‌—‌Iraq, Afghanistan, banking crisis, recession‌—‌but the pressing need for healthcare reform dumped another huge problem on to the To Do list. Right at the top of the reform agenda should have been the topic of cost. There was no other sane priority. In case you should doubt that, take a look at the projected costs of Medicare and Medicaid over the next seventy years in figure 3.5.28 The data are drawn from a 2011 study conducted by the nonpartisan Congressional Budget Office.


pages: 263 words: 80,594

Stolen: How to Save the World From Financialisation by Grace Blakeley

"Robert Solow", activist fund / activist shareholder / activist investor, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, basic income, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, bitcoin, Bretton Woods, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, corporate raider, credit crunch, Credit Default Swap, cryptocurrency, currency peg, David Graeber, debt deflation, decarbonisation, Donald Trump, eurozone crisis, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, fixed income, full employment, G4S, gender pay gap, gig economy, Gini coefficient, global reserve currency, global supply chain, housing crisis, Hyman Minsky, income inequality, inflation targeting, Intergovernmental Panel on Climate Change (IPCC), Kenneth Rogoff, Kickstarter, land value tax, light touch regulation, low skilled workers, market clearing, means of production, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, neoliberal agenda, new economy, Northern Rock, offshore financial centre, paradox of thrift, payday loans, pensions crisis, Ponzi scheme, price mechanism, principal–agent problem, profit motive, quantitative easing, race to the bottom, regulatory arbitrage, reserve currency, Right to Buy, rising living standards, risk-adjusted returns, road to serfdom, savings glut, secular stagnation, shareholder value, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, the built environment, The Great Moderation, too big to fail, transfer pricing, universal basic income, Winter of Discontent, working-age population, yield curve, zero-sum game

But that didn’t undermine capitalism as a social and economic system; and state ownership of the banks certainly didn’t undermine their commitment to enforcing private property. In fact, the way the bailouts were conducted reinforced the logic of finance-led growth: the state would use its power to give the markets what they wanted, and working people would be forced to pick up the tab. Transatlantic Banking Crisis or Structural Crisis of Financial Capitalism? Reading this account on its own could lead one to conclude that what happened in 2007 was simply a transatlantic banking crisis with its origins in the US. It then spread around the world due to a combination of financial globalisation and financial innovations like securitisation. In the aftermath of the crash, this is the view that dominated. It was the parasitical rentiers in the international finance sector that had brought the global economy to its knees.

The Rise of Global Finance The Political Consequences of Social Democracy Never Let a Serious Crisis Go to Waste Chapter Two Vulture Capitalism: The Financialisation of the Corporation The Big Bang Corporate Raiders, Hostile Takeovers and Activist Investors From Downsize and Distribute to Merge and Monopolise Chapter Three Let Them Eat Houses: The Financialisation of the Household The Enemy Within Privatised Keynesianism Blowing Bubbles Financialisation and Politics Chapter Four Thatcher’s Greatest Achievement: The Financialisation of the State Thatcher’s Greatest Achievement PFI: Profits for Investors The Bond Vigilantes Illiberal Technocracy Chapter Five The Crash Bubble Economics Financial Globalisation Securitisation, Shadow Banking and Inter-Bank Lending Bailout Britain Transatlantic Banking Crisis or Structural Crisis of Financial Capitalism? Chapter Six The Post-Crisis World The Long Recovery Secular Stagnation or Crisis of Capitalism? Austerity Economics Property-Owning Oligarchy The Coming Crisis Chapter Seven The Way Forward Capital Democratic Socialism Socialising Finance Finance for the People Conclusion Beyond Capitalism Notes Acknowledgements For my grandad, who taught me what it means to be a socialist, and my grandma, who taught me that only strong, intelligent, stubborn women have ever changed the world.

The Anglo-American model of finance-led growth — described in this book so far from the British perspective — was uniquely financially unstable, even as policymakers believed that they had mastered boom and bust. The Anglo-American model was premised upon the kind of debt-fuelled asset price inflation that has always resulted in bubbles. The one that burst in 2008 just happened to be the largest, most global, and most complex bubble that has ever been witnessed in economic history. In this sense, 2008 wasn’t simply a transatlantic banking crisis, it was the structural crisis of financial capitalism, emerging from the inherent contradictions of finance-led growth itself. The political regime of privatised Keynesianism, necessary to mitigate the fall in demand associated with low-wage, rentier capitalism, was always inherently unstable. Bank deregulation had created a one-off rush of cheap money that had inflated a bubble in housing and asset markets.


Global Governance and Financial Crises by Meghnad Desai, Yahia Said

Asian financial crisis, bank run, banking crisis, Bretton Woods, business cycle, capital controls, central bank independence, corporate governance, creative destruction, credit crunch, crony capitalism, currency peg, deglobalization, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, floating exchange rates, frictionless, frictionless market, German hyperinflation, information asymmetry, knowledge economy, liberal capitalism, liberal world order, Long Term Capital Management, market bubble, Mexican peso crisis / tequila crisis, moral hazard, Nick Leeson, oil shock, open economy, price mechanism, price stability, Real Time Gross Settlement, rent-seeking, short selling, special drawing rights, structural adjustment programs, Tobin tax, transaction costs, Washington Consensus

The process continues until there is some real event that means returns on the assets will be low in the future. Another possibility is that the central bank is forced to restrict credit because of fears of “overheating” and inflation. The result of one or both of these events is that the prices of real estate and stocks collapse. A banking crisis results because assets valued at “bubble” prices were used as collateral. There may be a foreign exchange crisis as investors pull out their funds and the central bank chooses between trying to ease the banking crisis or protect the exchange rate. The crises spill over to the real economy and there is a recession. 22 Franklin Allen and Douglas Gale In the popular press and academic papers, these bubbles and crises are often related to the particular features of the country involved. However, the fact that a similar sequence of events can occur in such widely differing countries as Japan, Norway, Finland, Sweden and Mexico suggest such bubbles and crashes are a general phenomenon.

The real economy was adversely affected by the aftermath of the bubble and growth rates during the 1990s have mostly been slightly positive or negative, in contrast to most of the postwar period when they were much higher. Similar events occurred in Norway, Finland and Sweden in the 1980s (see Heiskanen 1993; Drees and Pazarbasioglu 1995). In Norway, the ratio of bank loans to nominal GDP went from 40 percent in 1984 to 68 percent in 1988. Asset prices soared while investment and consumption also increased significantly. The collapse in oil prices helped burst the bubble and caused the most severe banking crisis and recession since the war. In Finland, an expansionary budget in 1987 resulted in massive credit expansion. The ratio of bank loans to nominal GDP 20 Franklin Allen and Douglas Gale increased from 55 percent in 1984 to 90 percent in 1990. Housing prices rose by a total of 68 percent in 1987 and 1988. In 1989, the central bank increased interest rates and imposed reserve requirements to moderate credit expansion.

At that point, the Federal Reserve was given broader powers and this together with the introduction of deposit insurance finally led to the elimination of periodic banking crises. In recent years many countries have had banking crises. These include the cases of Japan, Norway, Finland, Sweden and Mexico considered in the introduction. Many emerging countries have also had severe banking crises. Lindgren et al. (1996) find that 73 percent of the IMF’s member countries suffered some form of banking crisis between 1980 and 1996. There are two traditional views of banking panics. One is that they are random events, unrelated to changes in the real economy. The classical form of this view suggests that panics are the result of “mob psychology” or “mass hysteria” (see, for example, Kindleberger 1978). The modern version, developed by Diamond and Dybvig (1983) and others, is that bank runs are self-fulfilling prophecies.


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

Albert Einstein, anti-communist, bank run, banking crisis, Bretton Woods, British Empire, business cycle, 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, money market fund, moral hazard, new economy, open economy, plutocrats, Plutocrats, price stability, purchasing power parity, pushing on a string, rolodex, the market place

He was in the process of dissolving his partnership and was required briefly in the City. That same afternoon it was reported that Austria had declared war on Serbia and was already bombarding Belgrade. Despite this news, Norman, “feeling far from well” under the strain of the painful negotiations, decided to return to the country. Neither he nor almost anyone else in Britain imagined that over the next few days the country would face the most severe banking crisis in its history; that the international financial system, which had brought so much prosperity to the world, would completely unravel; and that, within less than a week, most of Europe, Britain included, would have stumbled blindly into war. Norman, indeed most of his countrymen, had paid only cursory attention to the brewing European crisis over the previous month. The assassination in Sarajevo of the archduke Franz Ferdinand, heir presumptive to the Austrian Empire, and his wife Sophie by a comic-opera band of bomb-throwing Serbian nationalists on June 28 had seemed at the time to be just another violent chapter in the disturbed history of the Balkans.

Schacht fought back. He blamed Gilbert for having misled him. He even turned on his erstwhile patron Stresemann, whom he accused of having undercut him by caving in to the Allies behind his back even before the conference had started and of now making him the scapegoat for the political fallout at home. While Schacht, even at this stage, would have been willing to go for broke and risk a global banking crisis, his government was not. Fearing that Germany would once again become a pariah nation, the cabinet disavowed his position, forced him to recant, and insisted that he return to Paris and resume negotiations on the basis of the last Allied proposal. He reluctantly agreed, provided the cabinet gave him political cover by publicly accepting final responsibility for any settlement. Schacht had no intention of ending up as the fall guy for what nationalists were bound to see as a sellout.

“I am ready to provide all the reserve funds that may be needed,” he reassured the bankers. Over the next few days, as the Fed did just that, New York City banks took over $1 billion in brokers’ loan portfolios. It was an operation that did not receive the publicity of the Morgan consortium, but there is little doubt that by acting quickly and without hesitation, Harrison prevented not only an even worse stock collapse but most certainly forestalled a banking crisis. Though the crash of October 1929 was by one count the eleventh panic to grip the stock market since the Black Friday of 1869 and was by almost any measure the most severe, it was the first to occur without a major bank or business failure. The market traded up for the last couple of days of October. It then fell back again, revisiting the lows of Black Tuesday on November 13. By the last weeks of November, the Dow had settled at around 240—a 40 percent retreat over the eight weeks since late September.


Money and Government: The Past and Future of Economics by Robert Skidelsky

anti-globalists, Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, barriers to entry, Basel III, basic income, Ben Bernanke: helicopter money, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, constrained optimization, Corn Laws, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Graeber, David Ricardo: comparative advantage, debt deflation, Deng Xiaoping, Donald Trump, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, Financial Instability Hypothesis, forward guidance, Fractional reserve banking, full employment, Gini coefficient, Growth in a Time of Debt, Hyman Minsky, income inequality, incomplete markets, inflation targeting, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, law of one price, liberal capitalism, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, market clearing, market friction, Martin Wolf, means of production, Mexican peso crisis / tequila crisis, mobile money, Mont Pelerin Society, moral hazard, mortgage debt, new economy, Nick Leeson, North Sea oil, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, Pareto efficiency, Paul Samuelson, placebo effect, price stability, profit maximization, quantitative easing, random walk, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, rising living standards, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, shareholder value, short selling, Simon Kuznets, structural adjustment programs, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, trade liberalization, value at risk, Washington Consensus, yield curve, zero-sum game

Financial flows multiplied relative to trade flows: in 2011, the total exports of merchandise and commercial services increased by $21.3 trillion, while the volume of foreign exchange transactions reached $4 trillion 332 g l ob a l i m b a l a n c e s g 62. Capital p g crises2 Figure mobilityy and banking 1.0 Capital mobility 0.9 index Percentage of countries in banking crisis, 3-year sum 0.8 capital mobility percentage of countries in banking crisis 0.7 0.6 40 35 30 25 0.5 20 0.4 15 0.3 10 0.2 5 0.1 0.0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 0 2010 a day. Trading in liquid assets – bank loans and equities – dwarfed direct foreign investment. An uncontrolled banking system was left free to place its bets anywhere. As long as current account deficits were being financed, no one paid any attention to them.

Bagehot argued that it was the Bank’s duty to keep large-enough reserves to be able, in a crisis, to lend freely to all solvent banks at a very high rate of interest. Widely resisted at the time on the high ground of ‘moral hazard’, it led to the Bank organizing the rescue of Barings in 1890. This was the doctrine that the US Federal Reserve signally failed to apply in the Lehman Brothers crisis of September 2008, and which the European Central Bank was debarred by law from applying in the European banking crisis that followed. V. Bi m e ta l l ism Until the early 1870s, the international monetary system was bimetallic: some countries, like Britain, were on a gold standard, and other countries, like France, were on both gold and silver standards. The customary ratio of exchange between gold and silver was 1:15. But both France (in 1873) and America (in 1879) de-monetized silver, and went on to a full gold standard. 29 Other states aspiring to be ‘first class’ countries with first class credit ratings also joined the gold standard.30 By the 1880s the gold standard had gone international. 50 t h e f ig h t for t h e g ol d s ta n da r d Figure 3.

Speed and strength of recovery varies not just from depression to depression, but from region to region. There can be a period of ‘crawling along the bottom’, or anaemic growth, or very strong (above-trend) recovery. A stylized representation of recovery from 2008–9 would look like this: Asia V-shaped; US U-shaped; Europe a combination of L-shaped (flat-lining) and W (double-dip). 5. Once the corner had been turned, the narrative of the Great Recession changed drastically. The banking crisis turned into a fiscal crisis, and the public debt problem took centre stage. It was at this point that the arguments for austerity began to gain traction. Austerity policies aimed to restore fiscal balances. The restoration of fiscal balance was seen as the necessary condition for recovery of private sector confidence, and hence investment and economic growth. As government tightened the fiscal screws, economic growth fizzled out, coincidentally or not.


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)

bank run, banking crisis, banks create money, Basel III, Bretton Woods, business cycle, call centre, capital controls, cashless society, central bank independence, credit crunch, David Graeber, debt deflation, double entry bookkeeping, eurozone crisis, financial exclusion, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, Hyman Minsky, inflation targeting, informal economy, information asymmetry, intangible asset, 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, negative equity, 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

While the increases in asset prices and the money supply may create the impression of a healthy, growing economy, this ‘boom’ is in fact fuelled by an increasing build-up of debt (since all increases in the money supply are a result of increases in borrowing). The current monetary system therefore sows the seeds of its own destruction – households and businesses cannot take on ever-increasing levels of debt, and when either start to default on loans, it can cause a chain reaction that leads to a banking crisis, a wider financial crisis, and an economy-wide recession. Financial crises therefore come about as a result of banks’ lending activities. As Adair Turner, head of the UK’s Financial Services Authority, puts it: “The financial crisis of 2007/08 occurred because we failed to constrain the private financial system’s creation of private credit and money.” (2012) The boom-bust cycle is also caused by banks’ credit creation activities.

In economic terms the permanent loss to the world economy has been estimated at a staggering $60 - $200 trillion, between one and three years of global production. For the UK the figures are between £1.8 and £7.4 trillion (Haldane, 2010). Yet while the 2007/08 crisis was undoubtedly a surprise to many, it would be wrong to think that banking crises are somehow rare events. In the UK there has been a banking crisis on average once every 15 years since 1945 (Reinhart and Rogoff, 2009), whilst worldwide there have been 147 banking crises between 1970 and 2011 (Laeven and Valencia, 2012). It seems clear that our banking system is fundamentally dysfunctional, yet for all the millions of words of analysis in the press and financial papers, very little has been written about the real reasons for why this is the case.

These results point to a serious problem with the current monetary system – the financial sector is perfectly capable of destroying itself and the rest of the economy with it on a periodic basis. Worryingly these crises tend to occur with some regularity – in the UK there has been 12 banking crises since 1800, with 4 of those coming since 1945 (Reinhart & Rogoff, 2009). Globally the situation is similar – Figure 4.4 shows the percentage of countries in a banking crisis between 1800 and 2007 (so excluding the most recent financial crisis) fig. 4.4 - Percentage of Countries affected by Banking Crises Source: Reinhart and Rogoff, 2008 Box 4.F - The house price bubble In the years preceding the most recent financial crisis, bank lending created a bubble in the property market in several countries. For example, Keen (2012) calculates that 78% of the change in American house prices over the past 25 years and 60% of the change in Australian house prices over the past 30 years can be explained by the acceleration in mortgage debt.


pages: 484 words: 136,735

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

"Robert Solow", bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Black Swan, bonus culture, Bretton Woods, BRICs, business cycle, buy and hold, Carmen Reinhart, cognitive dissonance, collapse of Lehman Brothers, Corn Laws, correlation does not imply causation, creative destruction, 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, information asymmetry, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kickstarter, laissez-faire capitalism, Long Term Capital Management, mandelbrot fractal, market design, market fundamentalism, Martin Wolf, money market fund, moral hazard, mortgage debt, Nelson Mandela, new economy, Northern Rock, offshore financial centre, oil shock, paradox of thrift, Pareto efficiency, Paul Samuelson, 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 inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, Vilfredo Pareto, Washington Consensus, zero-sum game

Yet, despite this textbook management by the government, Sweden suffered its worst recession in postwar history during this period. Thus, the first inference usually drawn from this experience is that deep recessions are inevitable after banking crises, even when these crises are vigorously managed. The second inference is that a banking crisis that is managed less skillfully than Sweden’s will surely produce a much worse recession, as it did in Japan. Luckily for the world, neither of these commonly accepted conclusions stands up to scrutiny. In the Swedish case, the recession actually began in 1990, almost two years before the banking crisis, and was caused by an extreme policy of high interest rates, which were raised at one point to above 100 percent in a desperate attempt to defend the Swedish kronor’s exchange rate against the deutsche mark. This misguided monetary policy caused the deep recession and then the collapse of the banking system, not the other way round.

Moreover, examining the causal connections the other way round, several extreme financial crises in recent history were not associated with broader economic downturns at all. The clearest such example is also one that refutes the conventional view that Japanese-style economic and financial paralysis must follow if zombie banks are kept on government life support and their losses hidden or disguised. By far the biggest banking crisis in postwar history prior to 2007-08 occurred from 1982 to 1989, when Mexico, Brazil, Argentina, the Philippines, and many other developing countries defaulted on bank loans worth several times more than the capital of the global banks. As a result, almost every major bank in the United States and Europe was technically insolvent throughout this five-year period. Citibank, J.P. Morgan, Bank of America, Deutsche, Lloyds, and many others suffered what would now be called mark-to-market losses worth between 100 percent and 300 percent of their total shareholders’ funds.13 Yet this horrendous crisis, even bigger in relation to the bank capital of the time than the losses from subprime lending in 2007-09, did not produce a recession.

Capitalism 4 will differ from Capitalism 3 by recognizing that these two desirable objectives are in conflict, but it cannot resolve this tension by sacrificing all financial innovation and creating a static financial system or by resorting to the overweening government intervention of Capitalism 2. Advanced capitalist countries, especially those with large and dynamic financial sectors such as the United States, Britain, and Switzerland, must resist populist demands to strangle nonbank financial institutions with punitive regulations inspired by the banking crisis. These countries have a clear comparative advantage in international finance. In a world of free trade, where prosperity generally progresses when nations specialize in their areas of comparative advantage, it is natural for Anglo-Saxon countries to have larger financial sectors and smaller manufacturing sectors than other countries. The Anglo-Saxon governments are therefore bound to oppose regulations that damage nonbank financial institutions.


When the Money Runs Out: The End of Western Affluence by Stephen D. King

Albert Einstein, Asian financial crisis, asset-backed security, banking crisis, Basel III, Berlin Wall, Bernie Madoff, British Empire, business cycle, capital controls, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, congestion charging, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cross-subsidies, debt deflation, Deng Xiaoping, Diane Coyle, endowment effect, eurozone crisis, Fall of the Berlin Wall, financial innovation, financial repression, fixed income, floating exchange rates, full employment, George Akerlof, German hyperinflation, Hyman Minsky, income inequality, income per capita, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Kickstarter, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, London Interbank Offered Rate, loss aversion, market clearing, mass immigration, moral hazard, mortgage debt, new economy, New Urbanism, Nick Leeson, Northern Rock, Occupy movement, oil shale / tar sands, oil shock, old age dependency ratio, price mechanism, price stability, quantitative easing, railway mania, rent-seeking, reserve currency, rising living standards, South Sea Bubble, sovereign wealth fund, technology bubble, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, trickle-down economics, Washington Consensus, women in the workforce, working-age population

Location decisions are unlikely immediately to change as a consequence of a sudden shift in the exchange rate, particularly now that corporate treasury departments use hedging strategies to insure against unanticipated movements in the currency markets. And there is another big difference. The US may have had a huge banking crisis in the 1930s but the UK did not. Monetary policy therefore could feed through to the broader economy relatively easily. That no longer applies: in the UK, thanks to an enormous banking crisis, the monetary drugs no longer appear to have the power of old. Despite these objections, there are plenty of people who argue that what the world needs now is a bigger dose of 1930s medicine, another New Deal, another period of economic stimulus to match the policies of the Depression era that reversed the earlier attachment to austerity and liquidation.

While the UK’s performance was even more miserable, the early 1980s collapse provided a precedent of sorts (although, on that occasion, the recession was followed by a strong recovery, which is more 33 4099.indd 33 29/03/13 2:23 PM When the Money Runs Out than can be said for the UK’s experience following the financial crisis). Even financially conservative countries succumbed to ongoing disappointment. Although Germany’s decline in 2008 and early 2009 was followed by a strong trade-­led recovery, the momentum didn’t last: by 2012, German exporters were being hit by a collapse in demand in southern Europe as a global banking crisis evolved into a eurozone sovereign crisis. Absent a decent recovery, the process of repaying debt – of deleveraging – has been made all the more difficult. Having thought they could grow their way out of their debt difficulties, Western policy-­makers have been forced to rethink their plans. Worse, persistently low levels of economic activity have made it much more difficult to deliver on the promises made before the onset of the financial crisis.

That, in turn, is likely to lead to even more caution within the private sector, leading to sustained economic weakness and, in time, making the fiscal arithmetic even worse. 218 4099.indd 218 29/03/13 2:23 PM Dystopia MISTRUST OF MONEY The conventional view is that inflation – let alone hyperinflation – is unlikely in a world of ongoing stagnation. The standard cyclical argument is simply that a country faced with deficient demand will have plenty of spare capacity and, hence, is unlikely to be able to generate conditions that might put upward pressure on prices. Even if the economy has entered into an extended period of stagnation, inflation will still be unlikely, particularly if the stagnation partly results from a banking crisis that chokes off the effect of the central bank’s printing press on the broader economy: Japan’s two lost decades provide the perfect example of such conditions. Yet, even in the most extreme recessionary circumstances, it is still possible to generate higher inflation. Roosevelt, after all, managed to do so between 1933 and 1936, fulfilling the pledge made in his May 1933 fireside chat, even though the US economy was, by then, but a shadow of its former self.


pages: 523 words: 111,615

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

"Robert Solow", accounting loophole / creative accounting, affirmative action, bank run, banking crisis, Berlin Wall, bonus culture, Branko Milanovic, BRICs, business cycle, 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, different worldview, disintermediation, Edward Glaeser, endogenous growth, 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, hedonic treadmill, Hyman Minsky, If something cannot go on forever, it will stop - Herbert Stein's Law, illegal immigration, income inequality, income per capita, industrial cluster, information asymmetry, intangible asset, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Jane Jacobs, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, light touch regulation, low skilled workers, market bubble, market design, market fundamentalism, megacity, Network effects, new economy, night-watchman state, Northern Rock, oil shock, Pareto efficiency, principal–agent problem, profit motive, purchasing power parity, railway mania, rising living standards, Ronald Reagan, selective serotonin reuptake inhibitor (SSRI), 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, zero-sum game

THE ECONOMIC CHALLENGES Although, as I write, there are tentative (and perhaps temporary) signs that a recovery is under way, the banking system is still being propped up by massive government help schemes and partial state ownership. Indeed the financial crisis might have further to go, depending for instance on whether European governments such as Greece can repay their debts, or how high unemployment stays and for how long. To say the economy is in a mess is an understatement. Any recession is unwelcome because people lose their jobs, and this has been no ordinary recession. The banking crisis made it the deepest since the Great Depression. The recovery will be a long, slow haul, and there will be a legacy of spending cuts, tax increases, and a huge government debt burden in many countries. The debate about public spending is not whether it will have to be cut, but rather how much and how quickly. It is hard to see where jobs will come from for the next few years. Financial crises have happened frequently throughout the history of capitalism.

The institutions, the rules for governing how we organize the large and complicated societies of the modern world, lag behind people’s behavior as they go about their day-to-day activities—working, spending, investing, saving. The sense of crisis will come to a head due to some trigger—in the mid-1970s it was the OPEC oil price rise, in 2008 the near-collapse of the global financial system. The current structural fragility revealed by the banking crisis has deeper causes. These lie in a dramatic series of technological innovations since the late 1970s, the information and communication technology (ICT) revolution. The financial sector is the most dramatic example of the way ICTs have revolutionized ways of organizing business and relationships in the economy. Technical change has been redrawing long-standing relationships throughout the economy, destroying and creating jobs and businesses.

The assumption underlying this focus has always been that greater wealth is good for people and brings greater contentment, or at least enough contentment to help keep governments in power. But some people have started to challenge this presumption. In the richest countries the relevance of growth as the central aim of policy has increasingly come to be questioned. The consumerism of the boom era has generated something of a sense of revulsion; as the economic and financial dust settles after the banking crisis, a sort of existential introspection questioning the moral basis of the economic order has set in. Don’t Western consumers have enough? And even though growth is agreed to be vital still for poor countries, it is often thought to come at a high cost—for example, in terms of its effects on traditional culture or urban squalor. The challenge to the central importance of growth as a policy goal dates back some years but has been strongly reinforced by the recent financial and economic crisis.


pages: 554 words: 158,687

Profiting Without Producing: How Finance Exploits Us All by Costas Lapavitsas

"Robert Solow", Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, borderless world, Branko Milanovic, Bretton Woods, business cycle, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, computer age, conceptual framework, corporate governance, credit crunch, Credit Default Swap, David Graeber, David Ricardo: comparative advantage, disintermediation, diversified portfolio, Erik Brynjolfsson, eurozone crisis, everywhere but in the productivity statistics, financial deregulation, financial independence, financial innovation, financial intermediation, financial repression, Flash crash, full employment, global value chain, global village, High speed trading, Hyman Minsky, income inequality, inflation targeting, informal economy, information asymmetry, intangible asset, job satisfaction, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, liberal capitalism, London Interbank Offered Rate, low skilled workers, M-Pesa, market bubble, means of production, money market fund, moral hazard, mortgage debt, Network effects, new economy, oil shock, open economy, pensions crisis, price stability, Productivity paradox, profit maximization, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, Robert Shiller, Robert Shiller, savings glut, Scramble for Africa, secular stagnation, shareholder value, Simon Kuznets, special drawing rights, Thales of Miletus, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, total factor productivity, trade liberalization, transaction costs, union organizing, value at risk, Washington Consensus, zero-sum game

FIG. 4 Bank assets as percentage of GDP; US, Japan, Germany, UK The bubble bursts, general crisis follows: 2007–2009 In 2006–2007 subprime mortgage holders started to default in large numbers in the US. As a result tradable securities created by the financial system on the back of household mortgages became gradually illiquid; consequently, banks began to face difficulties in accessing fresh funds in the money market; hence holders of financial liabilities associated with banks started to withdraw from the markets. A systemic banking crisis of liquidity and solvency gradually emerged. The immediate causes of the banking crisis in the US have been extensively discussed in the economic literature, attention being paid to the emergence of the ‘shadow’ banking system associated with money market funds and derivatives markets.31 Briefly put, money market mutual funds (MMMF) operating in the money markets diverted retail deposits away from ‘traditional’ banks; commercial banks securitized assets and moved them off the balance sheet; repurchase agreements (repos) were widely deployed to give liquidity to securitized bonds.

While a traditional bank run amounts to the mass withdrawal of deposits, a securitized bank run amounts to the mass withdrawal of repurchase agreements (repos). The cause of the run was concern about the liquidity of the bonds used as collateral for repos, particularly when these bonds were related to the subprime market. The result was that the US financial system became insolvent since it could not service its debts. The causes of the US banking crisis have also been attributed to the emergence of banks that are ‘too big to fail’. This issue is directly related to the regulation of the financial system – and is thus discussed in Chapter 10 – but it also has a bearing on the unfolding of the crisis. Lisa DeFerrari and David Palmer recognized the dominant role of a few financial institutions already in the early 2000s, coining the term ‘large complex banking organizations’.

Constriction of the supply of credit by banks and markets forced enterprises to cut back on output and employment; consumption declined as worried and over-indebted households rearranged expenditure; export markets collapsed, particularly for automobiles and consumer electronics. Developing countries also suffered as capital flows became problematic, necessitating emergency borrowing. The global turmoil that broke out in 2008 was thus spurred by a banking crisis and the ensuing tightening of credit. Pools of credit completely disappeared as financial institutions abandoned securitization; banks tightened credit provision in an attempt to improve liquidity and solvency; laden with debt and confronted with falling housing markets, households drastically reduced borrowing; aggregate demand declined, impacting on firm inventories, output and employment; investment collapsed across mature capitalist countries; international trade fell, contributing to a general recession.


pages: 665 words: 146,542

Money: 5,000 Years of Debt and Power by Michel Aglietta

bank run, banking crisis, Basel III, Berlin Wall, bitcoin, blockchain, Bretton Woods, British Empire, business cycle, capital asset pricing model, capital controls, cashless society, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, David Graeber, debt deflation, dematerialisation, Deng Xiaoping, double entry bookkeeping, energy transition, eurozone crisis, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, forward guidance, Francis Fukuyama: the end of history, full employment, German hyperinflation, income inequality, inflation targeting, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invention of writing, invisible hand, joint-stock company, Kenneth Arrow, Kickstarter, liquidity trap, margin call, means of production, money market fund, moral hazard, Nash equilibrium, Network effects, Northern Rock, oil shock, planetary scale, plutocrats, Plutocrats, price stability, purchasing power parity, quantitative easing, race to the bottom, reserve currency, secular stagnation, seigniorage, shareholder value, special drawing rights, special economic zone, stochastic process, the payments system, the scientific method, too big to fail, trade route, transaction costs, transcontinental railway, Washington Consensus

By granting overdrafts to the banks that accepted its supervision, the Suffolk Bank created interbank liquidity ex nihilo, which safeguarded the convertibility of notes even during banking crises. The other famous system was the New York Clearing House Association (NYCHA) created in 1853. This dealt with banking panics by issuing Clearing House Loan Certificates, which were successfully used during the terrible banking crisis of 1857.52 Exacerbating tensions between the economic interests of the Northeastern industrial and financial states and those of the Southern and Western states, the 1857 crisis sowed the seeds of the Civil War. THE NEED FOR A HIERARCHICALLY ORGANISED BANKING SYSTEM, AND THE ADVENT OF CENTRAL BANKS A clearing house is, then, a centralised organisation which introduces collective rationality into payment systems.

On the recommendation of a House commission, an 1878 law authorised the issuance of legal-tender certificates in silver, in order to mitigate the insufficiency of metal reserves in times of crisis.12 But this did not re-establish bimetallism. The quarrel over silver resumed in 1892 and reached its climax in the 1896 election campaign.13 Concerned by the erosion of metal reserves, foreign investors sought to withdraw their gold assets. Gold reserves contracted by some $45 million, with the result that, in June 1893, a banking crisis broke out in New York. John P. Morgan, pope of the city’s bankers, had to go to London to negotiate a gold loan, so that he would in turn be able to loan $65 million to the Treasury. This would allow the value of reserves to be pushed above the minimum level of $100 million. Due to his success, the United States overcame the monetary crisis. The return to growth and the resurgence of prices allowed for the official establishment of the gold standard in 1900.

Errors in appreciating asset price movements translated into massive undervaluations of credit risk, insufficient reserves, inadequate own funds, and distorted maturities. This resulted in improper exposure to the variations in short-term rates. In sum, the management of the bankers was calamitous. It was through such practices that dodgy credit accumulated during the US real estate boom from 1987 onwards. The rise in short-term rates in 1989 triggered the banking crisis. Restructuring took a long time, and required a new law, the FDICIA (Federal Deposit Insurance Corporation Improvement Act), adopted in 1991. The Act’s objective was to strengthen the legitimacy of the banks’ supervisory body in forcing the banks to manage their risks properly. The essential idea was the obligation placed on the supervisory body to take pre-emptive corrective action, and thus to detect which banks were fragile and force them to increase their own funds, or else restructure them before they fell into bankruptcy.


Rethinking Money: How New Currencies Turn Scarcity Into Prosperity by Bernard Lietaer, Jacqui Dunne

3D printing, agricultural Revolution, Albert Einstein, Asian financial crisis, banking crisis, Berlin Wall, BRICs, business climate, business cycle, business process, butterfly effect, carbon footprint, Carmen Reinhart, clockwork universe, collapse of Lehman Brothers, complexity theory, conceptual framework, credit crunch, different worldview, discounted cash flows, en.wikipedia.org, Fall of the Berlin Wall, fear of failure, fiat currency, financial innovation, Fractional reserve banking, full employment, German hyperinflation, happiness index / gross national happiness, job satisfaction, liberation theology, Marshall McLuhan, microcredit, mobile money, money: store of value / unit of account / medium of exchange, more computing power than Apollo, new economy, Occupy movement, price stability, reserve currency, Silicon Valley, the payments system, too big to fail, transaction costs, trickle-down economics, urban decay, War on Poverty, working poor

Nearly half are non-Hispanic white, 18 percent are black, and 26 percent are Latino. Perhaps the most surprising finding is that 28 percent work full-time, year round. These estimates defy the stereotypes of lowincome families.”5 The squeeze for cash has gotten more acute recently. Today, 80 percent of Americans report that they are living paycheck to paycheck. This is nearly double the figure in 2007, just before the banking crisis. One in five individuals earning over $100,000 per year report that they, too, are living from month to month.6 Savings are at an all-time low.7 Consequently, the need for credit is on an upswing while banks are not lending. The Failure of Money 13 The money system really isn’t serving humanity. The world’s population could hit 10 billion by 2050.8 Money is too scarce for many of Earth’s human inhabitants.

“Of those switchers, 610,000 U.S. adults (or 11 percent of the 5.6 million) cited Bank Transfer Day as their reason and actually moved their accounts from a large to a small institution.”2 Community Bankers of America said a poll of its 5,000 members found that nearly 60 percent of community banks are gaining customers who “are sick and tired” of the big financial institutions.3 95 96 PROSPERITY As described in Chapter 4, in functioning systems, nature leans more to resilience than efficiency. Ironically, whenever a banking crisis unfolds, governments invariably help the larger banks absorb the smaller ones, believing that the efficiency of the system is thereby increased. Instead, when a bank has proven to be “too big to fail,” why not consider the option of breaking it up into smaller units that compete with each other? This has been done in the United States before; for instance, the Bell Telephone monopoly was broken into competing “Baby Bells.”

According to Murphy’s research, uncleared checks totaled £5 billion when the banks opened again for business. “The direct use of means-of-payment money (bank deposits) was removed from the transaction process. In the absence of this money, exchange activity remained relatively unaffected because the public was prepared to use undated trade credit as the instrument of exchange.”7 Another variation of the mutual credit system was used to address a different banking crisis in another decade in another country. In this case, the banks threatened to suspend lines of credit, the lifelines of many businesses. The solution that arose is still in existence today. It is actually a major contributor to that country’s ongoing monetary stability and robustness. It is perhaps surprising to learn that the country where this happened is Switzerland, one of the world’s most economically conservative and stable countries.


pages: 223 words: 10,010

The Cost of Inequality: Why Economic Equality Is Essential for Recovery by Stewart Lansley

"Robert Solow", banking crisis, Basel III, Big bang: deregulation of the City of London, Bonfire of the Vanities, borderless world, Branko Milanovic, Bretton Woods, British Empire, business cycle, business process, call centre, capital controls, collective bargaining, corporate governance, corporate raider, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, deindustrialization, Edward Glaeser, Everybody Ought to Be Rich, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, Goldman Sachs: Vampire Squid, high net worth, hiring and firing, Hyman Minsky, income inequality, James Dyson, Jeff Bezos, job automation, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, laissez-faire capitalism, light touch regulation, Long Term Capital Management, low skilled workers, manufacturing employment, market bubble, Martin Wolf, mittelstand, mobile money, Mont Pelerin Society, Myron Scholes, new economy, Nick Leeson, North Sea oil, Northern Rock, offshore financial centre, oil shock, plutocrats, Plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, Right to Buy, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, shareholder value, The Great Moderation, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, Tyler Cowen: Great Stagnation, Washington Consensus, Winter of Discontent, working-age population

Up to the First World War, the main financial institutions were much bigger players in the economies of the big industrial nations. In the United States the most powerful businessman of the time was the banker JP Morgan. He was not just one of the world’s richest men at the turn of the nineteenth century, he controlled assets equivalent to some two-thirds of the nation’s output, giving him a stranglehold over American business. The banking crisis of 1907 was solved not by the intervention of government, but by a handful of private bankers led by Morgan. In the UK, the nineteenth century was the golden age of financial imperialism. Although the banks funded, through credit, the building of the nation’s infrastructure— notably the canals and railways—the lion’s share of financial investment went into overseas markets and a mix of speculative activity.

, op. cit. p 12-13. 142 C Toulouse, ‘Thatcherism, Class Politics and Urban Development in London’, Critical Sociology, Volume 18, 1992, p 62. 143 D Kynaston, The City of London, Volume IV, Pimlico, 2001, chapter 22. 144 Z/Yen, The Global Financial Centre Index, City of London Corporation, March 2007. 145 http://www.ifsl.org.uk/media/2333/Eco_con_of_UK_fin_ser_2007.pdf. 146 Centre for Research on Socio-Cultural Change (CRESC), An Alternative report on UK Banking Reform, University of Manchester, 2009, p 41. 147 Robin Blackburn,’ Finance and the Fourth Dimension’, New Left Review, 39, May/June, 2006. 148 Boston Consulting Group, Investment Banking and Capital Markets, Annual Reports. 149 Glyn, Capitalism Unleashed, op. cit. p 52. Elsewhere, the rise of finance proceeded somewhat less smoothly. In the 1990s, the growth slowdown in Germany and the Japanese banking crisis both led to slumps in the valuation of finance companies in those countries. 150 Merrill Lynch and Capgemini, World Wealth Report, 2010, figure 8. 151 José Gabriel Palma, ‘The revenge of the market on the rentiers. Why neo-liberal reports of the end of history turned out to be premature’, Cambridge Journal of economics, vol 33, issue 4, 2009. 152 IMF, Global Financial Stability Report, April 2009, Appendix Tables 3 and 4. 153 CRESC, op. cit. p 42. 154 Anthony Sampson, The Midas Touch, Hodder & Stoughton, 1989, p 13. 155 Quoted in R Roberts and D Kynaston, City State, Profile, 2002, p 116. 156 Bank for International Settlements, Triennial Central Bank Survey, Foreign Exchange and Derivatives Market Activity, September, 2010. 157 Harvey, Neoliberalism, op. cit. p 161; P Dicken, Global Shift, Guilford Press, 2003, ch 13. 158 N Shaxson, Treasure Islands, Bodley Head, 2011, p 74. 159 Ibid. p 78. 160 The Observer, 24 December, 2006. 161 M Hollingsworth and S Lansley, Londongrad, Fourth Estate, 2009, ch 4. 162 Ibid. 163 Michael Freedman, ‘Welcome to Londongrad’, Forbes Global, 23 May 2005; R.

From the beginning of the 1980s, the number of banking failures in the US started rising sharply, a problem exacerbated by the impact of bank deregulation. 231 In 1989, the bursting of a serious property bubble in Japan, triggered by a series of bank liquidity crises, led to a decade-long period of deflation and a sustained collapse in Japanese shares prices. It had been preceded by a decade of rising profits (which rose to 40 per cent of output) and soaring assert prices.232 Between 1990 and 1992, Norway, Sweden and Finland all suffered a banking crisis sparked by a similar property boom, the deregulation of financial services, and excessive lending by the banks. The economies of Sweden and Finland shrank for three years in succession. Finland’s unemployment rate hit 20 per cent in 1994. Again, only decisive action by the national governments prevented a more prolonged fall-out. Five years later, the Asian currency crisis, driven by financial over-reach, caused mayhem across south-east Asia when currency speculators pulled billions out of Asian currency markets.


pages: 597 words: 172,130

The Alchemists: Three Central Bankers and a World on Fire by Neil Irwin

"Robert Solow", Ayatollah Khomeini, bank run, banking crisis, Berlin Wall, Bernie Sanders, break the buck, Bretton Woods, business climate, business cycle, capital controls, central bank independence, centre right, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, currency peg, eurozone crisis, financial innovation, Flash crash, George Akerlof, German hyperinflation, Google Earth, hiring and firing, inflation targeting, Isaac Newton, Julian Assange, low cost airline, market bubble, market design, money market fund, moral hazard, mortgage debt, new economy, Northern Rock, Paul Samuelson, price stability, quantitative easing, rent control, reserve currency, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, savings glut, Socratic dialogue, sovereign wealth fund, The Great Moderation, too big to fail, union organizing, WikiLeaks, yield curve, Yom Kippur War

Spain, with more than ten times the population and a banking crisis of its own, was relying on about a third as much central-bank support for its banks. All this lending was making central bankers around Europe nervous: The more Irish banks relied on them for funding, the more the Bundesbank and the Banque de France and the others would be exposed if the Irish government ultimately defaulted on its debts. Trichet wrote a letter to the Irish government that expressed his unease, not so subtly suggesting that the ECB’s assistance for Irish banks wouldn’t be bottomless. He even said publicly that “it is not a normal situation to have institutions that are ‘addicted’ [to central-bank funding] and we are continually reflecting on how to deal progressively with this problem.” Comments like that made the Irish banking crisis worse, as depositors saw a risk that the ECB would start tightening up its emergency lending standards and leave the banks unable to pay off creditors with central-bank cash.

October 29, 1929—The U.S. stock market crashes on “Black Tuesday.” May 11, 1931—Credit-Anstalt, a leading Austrian bank, fails, prompting a ripple effect of withdrawals and more bank failures in Germany and elsewhere in Europe. July 9, 1931—Hans Luther, head of the German Reichsbank, travels to European capitals and then to meet fellow central bankers in Basel, looking in vain for international relief from the growing banking crisis. September 21, 1931—Britain leaves the gold standard, facing economic collapse should it try to maintain the peg of the pound to the price of gold. July 22, 1944—Global economic leaders finish a conference in Bretton Woods, New Hampshire, where they agree to a world economic order for the post–World War II globe. August 15, 1971—With the United States struggling to maintain the peg of the dollar to gold as mandated by the Bretton Woods system, President Richard Nixon suspends the gold window.

It’s a more precise metaphor than it may seem, for liquidity is exactly what was disappearing in the banking system that day. No longer were euros, dollars, and pounds as easy to come by as water. History has taught again and again that when banks shut down and hoard their money, so too do the economies they serve. A banker who’s unwilling to lend to other bankers is likely also to be unwilling to lend to the businesses and households that need money to build a factory or buy a house. If unchecked, the banking crisis in Europe could inflict untold damage on the world economy. Suddenly, the European habit of taking a lengthy late summer vacation had become very inconvenient. Gather the Executive Board, Trichet instructed Papadia. He needed to talk to the six officials from across Europe who share the collective authority to deploy the resources of the central bank—including the ability to create euros from thin air.


pages: 586 words: 160,321

The Euro and the Battle of Ideas by Markus K. Brunnermeier, Harold James, Jean-Pierre Landau

Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, battle of ideas, Ben Bernanke: helicopter money, Berlin Wall, Bretton Woods, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, collective bargaining, credit crunch, Credit Default Swap, currency peg, debt deflation, Deng Xiaoping, different worldview, diversification, Donald Trump, Edward Snowden, en.wikipedia.org, Fall of the Berlin Wall, financial deregulation, financial repression, fixed income, Flash crash, floating exchange rates, full employment, German hyperinflation, global reserve currency, income inequality, inflation targeting, information asymmetry, Irish property bubble, Jean Tirole, Kenneth Rogoff, Martin Wolf, mittelstand, money market fund, Mont Pelerin Society, moral hazard, negative equity, Neil Kinnock, new economy, Northern Rock, obamacare, offshore financial centre, open economy, paradox of thrift, pension reform, price stability, principal–agent problem, quantitative easing, race to the bottom, random walk, regulatory arbitrage, rent-seeking, reserve currency, road to serfdom, secular stagnation, short selling, Silicon Valley, South China Sea, special drawing rights, the payments system, too big to fail, union organizing, unorthodox policies, Washington Consensus, WikiLeaks, yield curve

This initiative met fierce resistance from France and south European central banks, who argued that at the height of the crisis only domestic banks were “willing” to buy government debt from vulnerable countries. In their view, domestic banks acted as a stabilizer for government bond markets. Forcing domestic banks to hold domestic government debt also serves as a commitment device for the government not to default on its debt since any subsequent default would trigger a widespread banking crisis and send the economy into a tailspin. Taking the domestic banks “hostage” however constitutes a “straitjacket commitment” that it is too strong as it rules out any debt restructuring even in extreme circumstances and might stifle growth in the long run. Crisis Management: Monetary Policy As we have seen, a financial economy is, by its very nature, not robust to adverse economic shocks.

The investment banking part of the new bank was eventually sold off to a Chinese investor, Haitong Securities, for €379 million.20 Senior bondholders in Novo Banco obtained, in effect, a guarantee through a €4.5 billion loan—an operation that provided a signal to the rest of the European banking sector. That loan may have limited possible spillover and contagion effects on the rest of the European banking sector, and fears that a new banking crisis would undermine the stabilization of the euro area receded.21 The fact that senior bondholders were still partially bailed out showed that the application of the not yet implemented rules would become very difficult. The next test of the new arrangements, which gave the ECB a great deal of power through its new supervisory powers, came with the announcement of the results of the comprehensive assessment consisting of an asset quality review (AQR) conducted by the ECB and the third EU-wide stress test, conducted by the EBA, on October 26, 2014 (a Sunday, when the markets were closed).

And these calls for crisis interventionism are yet another source of conflict: in the French tradition, emergency measures are part of the standard crisis-fighting toolkit, but German philosophy interprets every intervention as setting a precedent and so creating a new, permanent rules-based environment for the euro area. 11 Banking Union, European Safe Bonds, and Exit Risk Up to this point, our discussion of banking crisis mechanisms and crisis management could just as well apply to individual countries rather than entire currency blocs. We now instead turn to considerations that are special to currency unions, in particular, to one in which a deeply integrated political and fiscal union is, at least in the short and intermediate perspective, more utopia than a political feasibility. The heterogeneity of the economic philosophies and politics of the different members of the union together with a large and nationally fragmented financial sector created significant economic and financial stability challenges, not all of which were foreseen by the policy makers who wrote the Maastricht Treaty.


pages: 453 words: 117,893

What Would the Great Economists Do?: How Twelve Brilliant Minds Would Solve Today's Biggest Problems by Linda Yueh

"Robert Solow", 3D printing, additive manufacturing, Asian financial crisis, augmented reality, bank run, banking crisis, basic income, Ben Bernanke: helicopter money, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Branko Milanovic, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, clean water, collective bargaining, computer age, Corn Laws, creative destruction, credit crunch, Credit Default Swap, cryptocurrency, currency peg, dark matter, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, endogenous growth, everywhere but in the productivity statistics, Fall of the Berlin Wall, fear of failure, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, forward guidance, full employment, Gini coefficient, global supply chain, Gunnar Myrdal, Hyman Minsky, income inequality, index card, indoor plumbing, industrial robot, information asymmetry, intangible asset, invisible hand, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, laissez-faire capitalism, land reform, lateral thinking, life extension, low-wage service sector, manufacturing employment, market bubble, means of production, mittelstand, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, Nelson Mandela, non-tariff barriers, Northern Rock, Occupy movement, oil shale / tar sands, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, Productivity paradox, purchasing power parity, quantitative easing, RAND corporation, rent control, rent-seeking, reserve currency, reshoring, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, school vouchers, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Simon Kuznets, special economic zone, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, total factor productivity, trade liberalization, universal basic income, unorthodox policies, Washington Consensus, We are the 99%, women in the workforce, working-age population

Unlike other recessions that saw a V-shaped output drop and quick recovery, the 2008 crisis has seen a sharp fall in national output or GDP (gross domestic product) but a sluggish recovery. Economists have become worried that this is our collective future. There’s even a term revived by Harvard economist Lawrence Summers to describe a slow-growth world: ‘secular stagnation’. This was a term used by Alvin Hansen in the 1930s after the last systemic banking crisis to describe the resultant slow growth due in part to ageing societies, among other issues.2 Japan is the forerunner here, as the most aged economy. How would Solow judge the slow post-crisis recovery, and would he agree that we face a slow-growth future? This question is a pervasive one in the coming years for all developed economies. Finally, the consensus around globalization is under challenge.

Britain has moved into the spotlight when it comes to this debate since the vote to leave the European Union in June 2016 led the Bank of England to restart QE, which helps sustain low borrowing costs. Yields on ten-year government debt, known as gilts, fell to record lows of around just 1 per cent after the Brexit vote. Record lows had also been reached for twenty- and thirty-year debt. It meant that, for the first time, the British government could sell debt by paying around 1 per cent interest for a decade. Even with interest rates being raised in 2017 for the first time since the banking crisis, borrowing costs remain fairly low. So, do low interest rates affect the question of whether governments should borrow to invest now? Keynes pointed out that there is no ‘crowding out’ of private investment when the economy is operating below its potential. ‘Crowding out’ refers to how governments borrowing to invest would make it harder for private firms to do so because their demand for loans would push up the interest rate and make it more expensive for others to borrow.

They were referring not to a large drop in GDP or prices, but to a decline in the amount of money available in the economy as a consequence of widespread bank failures. In the year following the crash, the US money supply fell by a relatively small 2.6 per cent as the Federal Reserve cut interest rates and lent heavily to the banking sector. Injecting a great deal of cash into banks gave them some much-needed liquidity and prevented the stock market collapse from precipitating an immediate banking crisis. However, the Fed believed that further loosening of monetary policy might pump up the stock market bubble and lead to inflation. Between 1930 and 1933 the US money supply contracted by over a third, coinciding with a raft of bank failures. Between October 1930 and March 1933 there were four major bank runs. Most of these occurred between August 1931 and January 1932, when there were 1,860 bank failures and the money supply fell at an annual rate of 31 per cent.


pages: 374 words: 113,126

The Great Economists: How Their Ideas Can Help Us Today by Linda Yueh

"Robert Solow", 3D printing, additive manufacturing, Asian financial crisis, augmented reality, bank run, banking crisis, basic income, Ben Bernanke: helicopter money, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Branko Milanovic, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, clean water, collective bargaining, computer age, Corn Laws, creative destruction, credit crunch, Credit Default Swap, cryptocurrency, currency peg, dark matter, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, endogenous growth, everywhere but in the productivity statistics, Fall of the Berlin Wall, fear of failure, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, forward guidance, full employment, Gini coefficient, global supply chain, Gunnar Myrdal, Hyman Minsky, income inequality, index card, indoor plumbing, industrial robot, information asymmetry, intangible asset, invisible hand, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, laissez-faire capitalism, land reform, lateral thinking, life extension, manufacturing employment, market bubble, means of production, mittelstand, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, Nelson Mandela, non-tariff barriers, Northern Rock, Occupy movement, oil shale / tar sands, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, Productivity paradox, purchasing power parity, quantitative easing, RAND corporation, rent control, rent-seeking, reserve currency, reshoring, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, school vouchers, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Simon Kuznets, special economic zone, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, total factor productivity, trade liberalization, universal basic income, unorthodox policies, Washington Consensus, We are the 99%, women in the workforce, working-age population

Unlike other recessions that saw a V-shaped output drop and quick recovery, the 2008 crisis has seen a sharp fall in national output or GDP (gross domestic product) but a sluggish recovery. Economists have become worried that this is our collective future. There’s even a term revived by Harvard economist Lawrence Summers to describe a slow-growth world: ‘secular stagnation’. This was a term used by Alvin Hansen in the 1930s after the last systemic banking crisis to describe the resultant slow growth due in part to ageing societies, among other issues.2 Japan is the forerunner here, as the most aged economy. How would Solow judge the slow post-crisis recovery, and would he agree that we face a slow-growth future? This question is a pervasive one in the coming years for all developed economies. Finally, the consensus around globalization is under challenge.

Britain has moved into the spotlight when it comes to this debate since the vote to leave the European Union in June 2016 led the Bank of England to restart QE, which helps sustain low borrowing costs. Yields on ten-year government debt, known as gilts, fell to record lows of around just 1 per cent after the Brexit vote. Record lows had also been reached for twenty-and thirty-year debt. It meant that, for the first time, the British government could sell debt by paying around 1 per cent interest for a decade. Even with interest rates being raised in 2017 for the first time since the banking crisis, borrowing costs remain fairly low. So, do low interest rates affect the question of whether governments should borrow to invest now? Keynes pointed out that there is no ‘crowding out’ of private investment when the economy is operating below its potential. ‘Crowding out’ refers to how governments borrowing to invest would make it harder for private firms to do so because their demand for loans would push up the interest rate and make it more expensive for others to borrow.

They were referring not to a large drop in GDP or prices, but to a decline in the amount of money available in the economy as a consequence of widespread bank failures. In the year following the crash, the US money supply fell by a relatively small 2.6 per cent as the Federal Reserve cut interest rates and lent heavily to the banking sector. Injecting a great deal of cash into banks gave them some much-needed liquidity and prevented the stock market collapse from precipitating an immediate banking crisis. However, the Fed believed that further loosening of monetary policy might pump up the stock market bubble and lead to inflation. Between 1930 and 1933 the US money supply contracted by over a third, coinciding with a raft of bank failures. Between October 1930 and March 1933 there were four major bank runs. Most of these occurred between August 1931 and January 1932, when there were 1,860 bank failures and the money supply fell at an annual rate of 31 per cent.


pages: 823 words: 206,070

The Making of Global Capitalism by Leo Panitch, Sam Gindin

accounting loophole / creative accounting, active measures, 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, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collective bargaining, continuous integration, corporate governance, creative destruction, 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, Kickstarter, land reform, late capitalism, liberal capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, manufacturing employment, market bubble, market fundamentalism, Martin Wolf, means of production, money market fund, money: store of value / unit of account / medium of exchange, Monroe Doctrine, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, 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, zero-sum game

Much of the Fed’s intervention involved purchasing foreign currencies on Franklin’s behalf, assuring foreign creditors they would be paid—and even extending its lender-of-last-resort function to Franklin’s London office, on the grounds that “the failure of Franklin to perform on such a volume of international commitments would lead to a crisis of confidence in foreign exchange markets and possibly to an international banking crisis.”85 The grounds for such fears were real enough. The UK’s 1973 “secondary banking” crisis, which was also due to the collapse of a real-estate bubble, “threatened some of the biggest financial institutions with the real risk of collapse.”86 Moreover, a broad range of European banks were revealing major losses amid the volatility in short-term capital flows that were initially triggered by both floating currencies and the recycling of petrodollars.

Chapter 7. 11 As Ryner explained: “The rise of a grey capital market in the wake of sustained inflation, and currency swaps by Swedish multinationals, made it impossible to maintain regulations.” J. Magnus Ryner, Capitalist Restructuring, Globalization and the Third Way: Lessons from the Swedish Model, New York: Routledge, 2002, p. 161. See also Peter Englund, “The Swedish Banking Crisis: Roots and Consequences,” Oxford Review of Economic Policy, 15: 3 (1999), pp. 80–97. This is not to say the Swedish state suddenly became “weak”; in fact, its quick response to Sweden’s massive banking crisis of the early 1990s—including socializing the banks’ bad debts, and then developing a new pension system to provide them with a steady flow of workers’ savings—showed how a “strong state” was able to harness both social benefits and strong unions to the liberalization project in the course of coping with its inherent economic instabilities. 12 Singer, Is Socialism Doomed?

One of his first moves was the suspension of the dollar’s convertibility into gold—thereby breaking with the Federal Reserve’s stubborn clinging to the gold standard under Hoover. So frightened were the bankers themselves by the domestic situation at the time of Roosevelt’s inauguration that they made no objection to the sweeping emergency authority he immediately secured from Congress to deal with the banking crisis, granting the Treasury extensive powers, including the power to buy up all private gold bullion and certificates as well as to provide liquidity to the banks. As Charles and Mary Beard noted, “With an alacrity suggesting spontaneous combustion, excited Representatives and Senators rushed the draft through the two houses and placed it on the President’s desk before the end of the day. Neither Lincoln in 1861 nor Wilson in 1917 had been granted such drastic powers with so little haggling and bickering.”


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

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, break the buck, Bretton Woods, business cycle, 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, creative destruction, 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, information asymmetry, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandatory minimum, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, negative equity, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, 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, zero-sum game

Indeed, in one of the best-informed analyses of the crisis, Perry Mehrling of Columbia University argues that ‘it is not just the shadow banks but, more important, the larger capital-market based credit system that failed, and it is that failure that we must understand if we are to put the system back together again, and on more solid foundations this time. This financial crisis is not merely a subprime mortgage crisis or even a shadow-banking crisis; it is a crisis of the entire market-based credit system that we have constructed since 1970.’40 From the point of view of vulnerability to runs, a vital feature was that a new form of credit-backed money emerged. A working paper from the International Monetary Fund in 2012 summarized what happened: in recent decades, with the advent of securitization and electronic means of trading and settlement, it became possible to expand greatly the scope of assets that could be transformed directly, through their use as collateral, into liquid or money-like assets.

This would mean abandoning the idea that capital-market integration is always desirable or even, for some members, giving up the euro itself. Given the inability to create and sustain a Eurozone-wide financial system with a Eurozone-wide fiscal backstop, a logical alternative would be to segment the financial system and so permit national governments and/or national central banks to impose controls on capital flows. By accident more than design, the exchange controls adopted by Cyprus after its banking crisis would show the way. It is particularly important to curb cross-border funding of banks as part of country-oriented macroprudential regulation. Of course, this would be a violation of the explicit goals of the Eurozone. But attempting to achieve this has not worked too well. It might be more sensible to accept that even inside a currency union, finance should be domestically focused and managed.

Blinder, After the Music Stopped, pp. 229–31, and ‘Fed in $85bn AIG Rescue Deal’, Financial Times, 17 September 2008. 18. Paulson, On the Brink, p. 230. 19. Paul Davies and Michael Mackenzie, ‘Money Fund Sector Shocked as Reserve Breaks the Buck’, Financial Times, 18 September 2012. 20. On the administration in the UK, see http://www.pwc.co.uk/business-recovery/administrations/lehman/lehman-faq.jhtml. 21. House of Commons Treasury Committee, ‘Evidence on 24th June 2009’, Banking Crisis: Regulation and Supervision, 14th Report of Session 2008–09 (London: The Stationery Office, 31 July 2009), Ev32. 22. Ibid., p. 230. 23. Francesco Guerrera, Henny Sender, Michael Mackenzie, Krishna Guha, James Politi and Daniel Dombey, ‘Fears Emerge over $700bn Rescue’, Financial Times, 22 September 2008. 24. Henny Sender, Julie MacIntosh and Francesco Guerrera, ‘WaMu Taken Over by US Regulators’, Financial Times, 26 September 2012. 25.


pages: 514 words: 153,092

The Forgotten Man by Amity Shlaes

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

But Roosevelt was not so much thinking of religion as allowing that the religious impulse of charity should find expression in the political sphere. Hoover, meanwhile, was still trying to absorb what had happened to him. He paid a surprise visit to the Hoover Dam—“I never in my life saw a man look so worn out,” recalled an observer at Boulder City. Recognizing, better perhaps than any man, that something had to be done over the course of the winter to slow an alarming spread of the bank crisis, he made a point of showing himself to be a good soldier. He wrote memos. He telegraphed Roosevelt to ask for a meeting on the international debt problem—but also, really, in the hopes the two could be partners over the coming months. His moratorium was coming to an end and Britain and France were begging for reconsideration. Hoover, his Treasury Secretary, Ogden Mills, Roosevelt, and Ray Moley met at the White House, all so nervous that they smoked—Hoover had a fat cigar.

The effect of the death was to seal the conviction that the country could not go back to the 1920s, even if it wanted to. Willkie at this time had some news of his own. He became president of Commonwealth and Southern. He was also doubtless concerned about what was going on at home: farmers from Indiana, like those from six other states, were striking at the state capitals to win moratoria on their crushing debt and tax burdens. The uncertainty of the interregnum took its toll. When the banking crisis grew yet worse, Hoover tried contacting Roosevelt, even sending at one point a lengthy personal letter. Historians would later note that Hoover’s sense of urgency even showed up in the way he addressed the letter, misspelling Roosevelt’s name “Roosvelt.” Roosevelt was cruising the coast of Florida; Hoover expected to meet on his return. But Roosevelt was not interested in cooperation. We will never know all his motives, but it was clear that a crisis now could only strengthen his mandate for action come inauguration in March.

Now, in his first year in office, Roosevelt was showing them. He would present it all in what came to be known as the Hundred Days, that first frenzied period of legislative activity. 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.


EuroTragedy: A Drama in Nine Acts by Ashoka Mody

"Robert Solow", Andrei Shleifer, asset-backed security, availability heuristic, bank run, banking crisis, Basel III, Berlin Wall, book scanning, Bretton Woods, call centre, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, credit crunch, Daniel Kahneman / Amos Tversky, debt deflation, Donald Trump, eurozone crisis, Fall of the Berlin Wall, financial intermediation, floating exchange rates, forward guidance, George Akerlof, German hyperinflation, global supply chain, global value chain, hiring and firing, Home mortgage interest deduction, income inequality, inflation targeting, Irish property bubble, Isaac Newton, job automation, Johann Wolfgang von Goethe, Johannes Kepler, Kenneth Rogoff, Kickstarter, liberal capitalism, light touch regulation, liquidity trap, loadsamoney, London Interbank Offered Rate, Long Term Capital Management, low-wage service sector, Mikhail Gorbachev, mittelstand, money market fund, moral hazard, mortgage tax deduction, neoliberal agenda, offshore financial centre, oil shock, open borders, pension reform, premature optimization, price stability, purchasing power parity, quantitative easing, rent-seeking, Republic of Letters, Robert Gordon, Robert Shiller, Robert Shiller, short selling, Silicon Valley, The Great Moderation, The Rise and Fall of American Growth, too big to fail, total factor productivity, trade liberalization, transaction costs, urban renewal, working-age population, Yogi Berra

Economist Adam Posen wrote in 2005 that only when “seen through some European eyes” could Germany’s refusal in 2003 to undertake more fiscal consolidation be seen as improper or a “threat to the viability of the eurozone.” Germany, he wrote was responding in a “rational, if not optimal” manner to the economic realities it faced.170 To most European officials, however, the brief German rebellion was—​ and remains—​an instance of blatant and willful abuse of the rules. Indeed, in 2011, in the frenzied phase of the eurozone’s sovereign debt and banking crisis, Schröder himself did an about-​face on this matter. Although he continued to mumble that Germany deserved special treatment in 2002 and 2003, he expressed regret at having shown disrespect for the SGP.171 Meanwhile, the ECB quickly established itself as a practitioner of monetary policy dominantly focused on controlling inflation. To be sure, the ECB did lower its interest rates when economic weakness persisted.

Meanwhile, panic in the ABCP market spread fear to all short-​term funding markets, “even those that were not exposed to risky mortgages.”7 The largely unknown IKB thus became the symbol of a major fault line in the global financial system. Other German banks—​ including Commerzbank, Germany’s second-​ largest bank—​acknowledged that they had also incurred losses on their US subprime assets.8 Jochen Sanio, president of the German financial supervisory authority, dramatically declared that Germany faced its “worst banking crisis since 1931.”9 On Thursday, August 9, BNP Paribas, the largest French bank, notified investors that they could not withdraw their money from three of their funds that had purchased US subprime mortgages.10 The market value of the mortgages was declining, and BNP did not want to be left holding worthless assets while investors took their money and walked away. The BNP announcement was like a “match [that] had been lit in a dry forest.”11 Ben Bernanke, chairman of the Board of Governors of the Federal Reserve System since February 2006, later wrote that what had thus far been a “correction” in the subprime market was now a “crisis.”12 after the bust, the denial 195 The interbank market, the nervous system of international banking and finance, threatened to shut down.

Moody’s had lowered the credit ratings of many banks to below the minimum credit quality level required by the internal rules of some investors.114 In addition, investors were concerned that, with the yields on Spanish and Italian governments bonds soaring to “potentially unsustainable levels,” the two governments would not be able to rescue their banks. In fact, even eurozone authorities would find it difficult to mobilize sufficient resources to rescue Spain and Italy if they began tipping into a full-​ blown sovereign-​banking crisis. The Spanish government’s debt far exceeded the sum of Greek, Irish, and Portuguese debt. The Italian government’s debt 308   e u r o t r a g e d y was even larger. As the risks mounted, financial shock waves from Spain and Italy rumbled across Europe and the world. On July 23, Moody’s placed a “negative outlook” on the debt of the German, Dutch, and Luxembourg governments, threatening to take away their prized triple-​A rating.


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Keeping at It: The Quest for Sound Money and Good Government by Paul Volcker, Christine Harper

anti-communist, Ayatollah Khomeini, banking crisis, Bretton Woods, business cycle, central bank independence, corporate governance, Credit Default Swap, Donald Trump, fiat currency, financial innovation, fixed income, floating exchange rates, forensic accounting, full employment, global reserve currency, income per capita, inflation targeting, liquidationism / Banker’s doctrine / the Treasury view, margin call, money market fund, Nixon shock, Paul Samuelson, price stability, quantitative easing, reserve currency, Right to Buy, risk-adjusted returns, Ronald Reagan, Rosa Parks, secular stagnation, Sharpe ratio, Silicon Valley, special drawing rights, too big to fail, traveling salesman, urban planning

He noted that international banking and free currency markets had been effectively shut down by the war, but they were on the way back. Speculation and excessive risk taking, à la the late 1920s, would reappear. He warned that the inevitable crises would be easier to deal with if they were concentrated inside the regulated banking system rather than outside, without official oversight. I later recalled that warning while distinguishing between the manageable Latin American banking crisis in the 1980s, in which United States and foreign banks found themselves with huge portfolios of loans to countries in Latin America and other emerging markets that couldn’t repay them, and the subsequent highly damaging Asian monetary crisis little more than a decade later, complicated by contagious currency speculation and international capital flows. The temptation to travel through Europe with a friend or two during the long intervals between academic sessions was impossible to resist.

Chairmen didn’t exercise a strong hand and the board members were little known. The New York Federal Reserve Bank, with its operating responsibilities and a widely respected leader in Benjamin Strong, emerged as the focal point for monetary policy, both domestic and international. That pattern continued for a time after Strong died in 1928 but without the same degree of respect for the leadership. The following year’s stock market crash, the severe banking crisis, and the ensuing Great Depression inevitably raised questions about the effectiveness of Federal Reserve policy. A strong new chairman of the Washington-based board, Marriner Eccles, eventually succeeded with President Roosevelt’s support in convincing Congress to rewrite key sections of the Federal Reserve Act in 1935. The Board of Governors, independent of Treasury participation,* was placed more clearly in charge.

President Nixon’s electoral priorities in 1971 and 1972 easily overrode the need to sustain a stable currency. (As the Watergate break-in and cover-up later proved, those electoral priorities also overrode other important considerations.) With the loss of international discipline and strong fiscal and monetary policies, an inflationary process took hold. By the accidents of fortune, I was destined a few years later to lead the effort to deal with the Great Inflation and the related Latin American banking crisis. A Useful Treasury Legacy Before leaving the Treasury, I did have the opportunity to put in place some useful reforms in how the US government borrows money. In this area, we could make most of the changes on our own, without legislation or international agreement. For decades, the Treasury Department’s standard practice in selling notes and bonds (debt securities maturing in more than a year) was to announce to potential buyers an offering date for a certain dollar amount at a stated maturity and a fixed interest rate.


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

accounting loophole / creative accounting, asset-backed security, bank run, banking crisis, Black-Scholes formula, Blythe Masters, break the buck, Bretton Woods, business climate, business cycle, buy and hold, collateralized debt obligation, commoditize, creative destruction, 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, Kickstarter, locking in a profit, Long Term Capital Management, McMansion, money market fund, mortgage debt, North Sea oil, Northern Rock, Renaissance Technologies, risk tolerance, Robert Shiller, Robert Shiller, Satyajit Das, short selling, sovereign wealth fund, statistical model, The Great Moderation, too big to fail, value at risk, yield curve

It was a powerful role, including the oversight of New York commercial banks, and Corrigan, a forceful, burly character with a gravelly voice, was not afraid to express his views bluntly. By 1991, he had already worked at the Fed for a couple of decades, serving as special assistant for a period to the legendary Paul Volcker, and he had seen the financial system suffer through several business cycles and bouts of panic. He had cut his teeth handling the Herstatt Bank crisis of 1974, when the failure of a small German group had rocked the Euromarket, and had confronted the Latin American debt crisis, the collapse of Continental Illinois National Bank, and the failure of Drexel Burnham Lambert. “I have seen it all before,” Corrigan was fond of growling. All that experience had left him uneasy about the tendency of bankers to sow havoc when left to their own devices.

And they were just so proud of what they had done.” [ FOUR ] THE CUFFS COME OFF BISTRO-style CDS trades quickly took off. In early 1998, the J.P. Morgan swaps team conducted a second $10 billion deal, “insuring” another huge chunk of the bank’s loans and bonds. That success led the team to start marketing the service to others. Japanese banks were among the first to bite. By 1998, Japan was in the throes of a full-blown banking crisis that had left the largest banks desperate to find a way to reduce their risk. In the summer, the team cut a series of billion-dollar deals with lending institutions including Fuji, IKB, Daiwa, and Sanwa. Soon after, Masters arranged a BISTRO structure for Pittsburgh-based bank PNC. Demchak already knew that group well, since PNC was his hometown bank, and he had helped to restructure some troubled interest-rate derivatives deals that PNC had made in the early 1990s.

Though he had spent less time studying the repo market, he could also see that if Bear was to default on its repo contracts, that would prompt investors to panic. “If Alan Schwartz [the Bear CEO] is worried, he had better call me,” Geithner told Bear’s lawyers. The next day Schwartz duly called Geithner. “So which institutions are you talking to?” Geithner asked. He badly hoped that Bear might be able to sell itself. A decade earlier, Geithner had worked in Tokyo, as financial attaché to the US Embassy, just as the Japanese banking crisis was getting under way. The Japanese had dealt with failing banks by persuading a stronger institution to step in, and Geithner hoped that such a shotgun marriage could save Bear. Schwartz told Geithner that there were two possible suitors, JPMorgan Chase and Barclays Capital. “Better go back and get talking again!” Geithner said. He then asked his staff to check independently whether the two banks really were serious contenders.


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

asset-backed security, bank run, banking crisis, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black-Scholes formula, Blythe Masters, 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, hedonic treadmill, hindsight bias, housing crisis, Hyman Minsky, intangible asset, interest rate swap, invisible hand, Jane Jacobs, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, Kickstarter, laissez-faire capitalism, light touch regulation, liquidity trap, Long Term Capital Management, loss aversion, Martin Wolf, money market fund, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, negative equity, new economy, Nick Leeson, Norman Mailer, Northern Rock, Own Your Own Home, Ponzi scheme, quantitative easing, reserve currency, Right to Buy, 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

A long march toward the free market began, and in 2001 the banks were privatized, a policy which was a triumphant success—until it turned into a total disaster. That’s how fast, and how completely, things can go wrong for a society if its banks go bad. This is because banks are central to the operation of a developed economy; in particular, they are central to the creation of credit, and credit is as important to the modern economy as oxygen is to human beings. When the banks go wrong, everything goes wrong: a bank crisis gives you that slamming-the-car-into-reverse feeling. This is how it’s supposed to work. A well-run bank is a machine for making money. The basic principle of banking is to pay a low rate of interest to the people who lend money and charge a higher rate to the people who borrow it. The bank borrows at 3 percent (say), and lends at 6 percent, and as long as it keeps the two amounts in line and makes sure that it lends money only to people who will be able to pay it back, it will reliably make money forever.

Nonetheless, I guarantee that at this very moment, somewhere in the world, somebody at one of the big banks is sitting with his head in his hands, looking at the company’s balance sheet and sweating over this very problem. This might especially be the case in Europe, where banks and governments have delayed the reckoning with bad assets and bank insolvency for as long as they can. If the global economic crisis can be reduced to one single phenomenon, it is this: the fact that nobody knows which banks are solvent. Because banks are crucial to the creation and operation of credit, a bank crisis leads directly to a credit crunch. It’s also why the huge amounts of money being pumped into the banking sector by governments are tending not to do the thing they were supposed to do, that is, restart lending to businesses and consumers. That’s because—and here we can have that very rare thing, a brief moment of sympathy for the banksters—the banks are being given two totally incompatible goals.

There is a sour joke among financial types, referring to the chronic pessimism and down-speak of economics, “the dismal science”: they say that “economists have predicted seven of the last three downturns.” Ho ho. But they sure didn’t predict this one. Just to repeat the basic point: a 20 percent drop in U.S. home prices, not on the face of it an extraordinarily unlikely thing, was enough to cause a global banking crisis that nearly destroyed the entire system, followed by a global recession verging on depression. So why didn’t more economists seem aware of that possibility? Has the profession really drifted that far away from the real world? The short answer is that with some stellar exceptions—Robert Shiller, Nouriel Roubini, Paul Krugman, and John Kay conspicuous among them—yes, it has. The profession’s preference for textbook-perfect academic models of phenomena led to it being AWOL during the biggest economic crisis since the 1930s.


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Broken Markets: A User's Guide to the Post-Finance Economy by Kevin Mellyn

banking crisis, banks create money, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, business cycle, buy and hold, call centre, Carmen Reinhart, central bank independence, centre right, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, crony capitalism, currency manipulation / currency intervention, disintermediation, eurozone crisis, fiat currency, financial innovation, financial repression, floating exchange rates, Fractional reserve banking, global reserve currency, global supply chain, Home mortgage interest deduction, index fund, information asymmetry, joint-stock company, Joseph Schumpeter, labor-force participation, light touch regulation, liquidity trap, London Interbank Offered Rate, market bubble, market clearing, Martin Wolf, means of production, mobile money, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Ponzi scheme, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, rising living standards, Ronald Coase, seigniorage, shareholder value, Silicon Valley, statistical model, Steve Jobs, The Great Moderation, the payments system, Tobin tax, too big to fail, transaction costs, underbanked, Works Progress Administration, yield curve, Yogi Berra, zero-sum game

Second, they became too large to manage effectively—something called “diseconomies of scale”—so bureaucracies and overheads multiplied, with bouts of reorganizations and head-count reductions as a periodic corrective. Innovation, customer service, and the ability to react to new competitors (except to buy them and kill them) all suffered from gigantism. Given where the industry had arrived by 2007, the remarkable thing is not that there was a banking crisis on the scale we experienced, but that one didn’t occur earlier. How Government Policy and Central Banks Shaped the Market Meltdown As mentioned at the beginning of this chapter, the dominant narrative has it that the greedy banks on Wall Street somehow caused the crisis in the financial markets by taking reckless risks in pursuit of outsized bonuses. There is much truth in that allegation. But the reality is actually worse: the top management of the largest banks by and large didn’t understand the risks on their balance sheets and trading desks.

The UK government, at vast expense, ended up owning its two largest domestic bank groups. It is easy with 20/20 hindsight to be critical of men and women scrambling to keep financial Armageddon at bay. What did emerge from all the skin-of-ourteeth crisis management, however, were three key facts. First, the too-big-to-fail institutions ended up even bigger and became almost impossible to manage. The Japanese banking crisis had resulted in something similar. Second, vast amounts of public money spent on the bank bailouts and driving interest rates to record lows left the authorities with little ammunition in case the crisis took a turn for the worse—indeed, countries such as Ireland were driven to the brink by guarantees of banking system deposits. Third, the publics of all the countries affected were alienated and angered by the entire process, greatly limiting the options the national government would have available if the crisis entered a new phase.

Nobody can be certain of the costs for any country of leaving the euro—or, if a major country defaults, the costs staying in. The Maastricht Treaty—the treaty that launched the European Union—left no line of retreat; joining the euro was specifically intended to be an irreversible decision with no escape hatches allowed. That said, major banks and corporations around the world are beginning to think the unthinkable and plan for the collapse of the euro under different scenarios. Why a European Banking Crisis Threatens America The 1990s saw the substantial concentration of deposits in the largest institutions within the US banking system, and the 2008 panic triggered shotgun weddings that put a capstone on the progress. Today, the majority of the US banking and payments system operates within and between seven or eight banks.These same banks provide much of the short-term funding and liquidity needed by an even more concentrated investment-banking industry, as well as the clearing and settlement of trades on the stock exchanges.


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

accounting loophole / creative accounting, bank run, banking crisis, Bernie Madoff, Black Swan, business cycle, capital controls, central bank independence, collateralized debt obligation, creative destruction, 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, money market fund, 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

Bartiromo, "Bill Clinton on the Banking Crisis." 27. Gillespie and Welch, "`I Think the SEC Was Distracted."' 28. Kelly, "Where in the World Is Bear's Jimmy Cayne?" 29. CNBC's Jim Cramer, who had warned of "Armageddon" as far back as August 2007, gave less impressive advice this time. On the March 11, 2008, edition of Mad Money he shouted, "No! No! No! Bear Stearns is fine! ... Don't move your money from Bear! That's just being silly! Don't be silly!" 30. Davis, "Lehman Sought Millions for Execs." 31. Onaran and Helyar, "Fuld Sought Buffett Offer." 32. Dan Duyn, Brewster, and Tett, "The Lehman Legacy"; Onaran Helyar; Ohlsson, "Bushs nej blev starten pa den globala finanskrisen." 33. Poor, "Knock Out." 34. Gullapalli and Anand, "Bailout of Money Funds." 35. Bartiromo, "Bill Clinton on the Banking Crisis." 36.

It also made concerned British savers start to withdraw their money from Landsbanki, which had established itself successfully in the United Kingdom under the name of Icesave. Iceland's government and central bank did all they could to get hold of liquidity and even asked the central banks of other countries where the banks had operations for loans, but to no avail. The Icelanders had nowhere left to go. On October 6, Prime Minister Geir Haarde asked for broad powers to handle the banking crisis, concluding his speech with the words Gud blessi island-"God help Iceland." The next day, the government used its new powers to nationalize Landsbanki. It promised that it would guarantee the money of Icelandic savers while foreign savers would be given compensation, if possible, up to 20,000 euros ($27,000), in line with European guarantee agreements. But it also hinted that there probably was not enough money even for that, at least not right away.

"Tax Break May Have Helped Cause Housing Bubble." New York Times, December 19, 2008. Barr, Alistair. "Moody's Downgrades 691 Mortgage-Backed Securities." Market- Watch.com, August 16, 2007. Barrett, Wayne. "Andrew Cuomo and Fannie and Freddie: How the Youngest Housing and Development Secretary in History Gave Birth to the Mortgage Crisis." Village Voice, August 5, 2008. Bartiromo, Maria. "Bill Clinton on the Banking Crisis, McCain, and Hillary." Business Week, September 24, 2008. Bartlett, Bruce. Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy. New York: Doubleday, 2006. BBC News online. "Icesave Savers Warned on Accounts," October 7, 2008. Becker, Jo, Sheryl Gay Stolberg, and Stephen Labaton. "White House Philosophy Stoked Mortgage Bonfire." New York Times, December 21, 2008.


pages: 385 words: 111,807

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

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, corporate raider, creative destruction, 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, Gunnar Myrdal, Haber-Bosch Process, happiness index / gross national happiness, high net worth, income inequality, income per capita, information asymmetry, intangible asset, 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, liberation theology, manufacturing employment, Mark Zuckerberg, market clearing, market fundamentalism, Martin Wolf, means of production, Mexican peso crisis / tequila crisis, Nelson Mandela, Northern Rock, obamacare, offshore financial centre, oil shock, open borders, Pareto efficiency, Paul Samuelson, 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, Vilfredo Pareto, Washington Consensus, working-age population, World Values Survey

Outputs fluctuated much less than in the previous periods, not least thanks to Keynesian fiscal policy, which increased government spending during downturns and reduced it during booms.20 The rate of inflation, that is, the rate at which the general price level rises, was relatively low.21 And there was a very high degree of financial stability. During the Golden Age, virtually no country was in banking crisis. In contrast, since 1975, anything between 5 and 35 per cent of countries in any given year have been in banking crisis, except for a few years in the mid-2000s.22 So in every measure the Golden Age was a remarkable period. When Harold Macmillan, the British prime minister, said, ‘You’ve never had it so good,’ he wasn’t exaggerating. Exactly what lay behind this sterling economic performance, which was unprecedented and has since been unparalleled, is a matter of an ongoing dispute.

The Brazilian crisis followed in 1999 and the Argentinian one in 2002, both in large part the results of financial deregulation. These are only the prominent ones, but the world has seen so many more financial crises since the mid-1970s. According to a widely cited study,17 virtually no country was in banking crisis between the end of the Second World War and the mid-1970s, when the financial sector was heavily regulated. Between the mid-1970s and the late 1980s, the proportion of countries with banking crisis rose to 5–10 per cent, weighted by their share of world income. The proportion then shot up to around 20 per cent in the mid-1990s. The ratio then briefly fell to zero for a few years in the mid-2000s, but went up again to 35 per cent following the 2008 global financial crisis. The ‘unholy alliance’ between short-term-oriented shareholders and professional managers has reduced the ability of corporations to invest The rise of the ‘shareholder value maximization’ model in the era of new finance has dramatically reduced the resources available for long-term investments in non-financial corporations.

REAL-LIFE NUMBERS There has been a vast increase in the frequency of financial crises For most people, the 2008 global financial crisis is probably proof enough that the new financial system has failed to deliver on its promises for greater efficiency and stability. But it is important to note that the 2008 crisis was presaged by many earlier, smaller crises in the last three decades. The list, even counting only the major ones, is impressive. In 1982, Chile got into a major banking crisis, following the radical financial market liberalization in the mid-1970s under the Pinochet dictatorship. In the late 1980s, the Savings and Loan (S&L) companies in the US – also known as ‘thrifts’ – got into massive trouble, having been allowed by the government to move into more risky, but potentially higher-yielding, activities, such as commercial real estate and consumer loans. The US government had to close down nearly one-quarter of S&Ls and inject public money equivalent to 3 per cent of GDP to clean up the mess.


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The Panama Papers: Breaking the Story of How the Rich and Powerful Hide Their Money by Frederik Obermaier

banking crisis, blood diamonds, credit crunch, crony capitalism, Deng Xiaoping, Edward Snowden, family office, high net worth, income inequality, Kickstarter, liquidationism / Banker’s doctrine / the Treasury view, mega-rich, Mikhail Gorbachev, mortgage debt, Nelson Mandela, offshore financial centre, optical character recognition, out of africa, race to the bottom, We are the 99%, WikiLeaks

[ ] In Reykjavik we meet our colleague Jóhannes Kristjánsson, arguably Iceland’s best-known investigative journalist, with the most accolades to his name. He used to work in public radio in Iceland, and produced remarkable material on the causes of the banking crisis in his country. He has also conducted undercover research into drug abuse and exposed sex offenders. He is currently working as a freelance journalist, focusing entirely on the Prometheus project. His story is bound to capture the attention of the masses in this country, whose political landscape was shattered by the banking crisis of 2008. Prime Minister Sigmundur Gunnlaugsson, you will recall, cropped up early on in our investigations. If you remember, he and his wife, through the intermediary of the Luxembourg branch of Landsbanki, set up a company with Mossfon in the British Virgin Islands: Wintris Inc.

In his bestseller The Unwinding, US author George Packer describes, precisely and without getting worked up, how the financial elite have dominated the US economy, the absurd repercussions this has for the rest of the country and why citizens who weren’t previously especially politically engaged suddenly got involved in the Occupy Wall Street movement: because they felt betrayed by ‘them up there’. By men like Sanford I. Weill, the founder of what was once the biggest bank in the world, Citibank. The banker, with his aristocratic appearance, is considered to be one of the figures who was jointly responsible for the banking crisis of 2008 that was caused by irresponsible deals. Sanford I. Weill is a hate figure of the Occupy Wall Street movement and was, of course, a Mossack Fonseca client. He held a shell company called April Fool with the Panamanian law firm. He gave the same name to his sixty-metre yacht, because Sandy, as he’s known to his friends, met his wife Joan on 1 April 1954.3 That’s the world of the 1 per cent

Under the accepted rules of politics, as finance minister, no less, it will be hard for him to hold on to his position. This may also be the case for Ólöf Nordal, the serving interior minister, who according to Jóhannes had power of attorney for a company named Dooley Securities S.A.8 [ ] The Panama Papers will place the government under extreme pressure to explain itself. ‘The people of Iceland have gone through so much since the bank crisis that now they will have zero sympathy with an extremely rich prime minister and his extremely rich wife, who used an offshore company to secretly buy bank bonds,’ Jóhannes explains. He is in an absurd situation: he has the material that may force the prime minister of his country to step down, he has the story of the year ready and waiting, and has had since spring 2015 – yet he still has to wait, and keep on waiting, until we are all ready to publish in spring 2016.


pages: 353 words: 81,436

Buying Time: The Delayed Crisis of Democratic Capitalism by Wolfgang Streeck

activist fund / activist shareholder / activist investor, banking crisis, basic income, Bretton Woods, business cycle, capital controls, Carmen Reinhart, central bank independence, collective bargaining, corporate governance, creative destruction, David Graeber, deindustrialization, Deng Xiaoping, Eugene Fama: efficient market hypothesis, financial deregulation, financial repression, fixed income, full employment, Gini coefficient, Growth in a Time of Debt, income inequality, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, knowledge economy, labour market flexibility, labour mobility, late capitalism, liberal capitalism, means of production, moral hazard, Myron Scholes, Occupy movement, open borders, open economy, Plutonomy: Buying Luxury, Explaining Global Imbalances, profit maximization, risk tolerance, shareholder value, too big to fail, union organizing, winner-take-all economy, Wolfgang Streeck

A NEW TYPE OF CRISIS Capitalism in the rich democratic countries has for several years now been in the throes of a threefold crisis, with no end in sight: a banking crisis, a crisis of public finances, and a crisis of the ‘real economy’. No one foresaw this unprecedented coincidence – not in the 1970s, but also not in the 1990s. In Germany, because of special conditions13 that had arisen more or less by chance and seem rather exotic to the outside world, the crisis hardly registered with people for years, and there was a tendency to warn against ‘hysteria’. In most of the other rich democracies, however, including the United States, the crisis cut deep into the lives of whole generations and by 2012 was in the process of turning the conditions of social existence upside down. 1) The banking crisis stems from the fact that, in the financialized capitalism of the Western world, too many banks had extended too much credit, both public and private, and that an unexpectedly large part of this suddenly turned bad.

Here too, though – and this is the core of the problem – no more than guesses are possible. 2) The fiscal crisis is the result of budget deficits and rising levels of government debt, which go back to the 1970s (Fig 1.1),15 as well as the borrowing required since 2008 to save both the finance industry (through the recapitalization of financial institutions and the acquisition of worthless debt securities) and the real economy (through fiscal stimuli). The increased risk of government insolvency in a number of countries is reflected in the higher costs of old and new debt. To regain the ‘confidence’ of ‘the markets’, governments impose harsh austerity measures on themselves and their citizens, with mutual supervision within the European Union, going as far as a general ban on new borrowing. That does not help to alleviate the banking crisis, or a fortiori the recession in the real economy. It is even debatable whether austerity reduces the debt burden, since it not only fails to promote growth but probably has a negative impact on it. And growth is at least as important as balanced budgets in lowering the national debt. FIGURE 1.1 Public debt as percentage of national product: OECD average Countries in unweighted average: Austria, Belgium, Canada, France, Germany, Italy, Netherlands, Norway, Sweden, UK, USA Public debt as percentage of national product: seven countries Source: OECD Economic Outlook: Statistics and Projections 3) Finally, the crisis of the real economy manifest in high unemployment and stagnation (Fig. 1.2)16 partly stems from the fact that firms and consumers have difficulty in obtaining bank loans – because many of them are already deep in debt and the banks are risk-averse and short of capital – while governments have to curb their expenditure or, if it can no longer be avoided, raise taxes.

After 2008 it was therefore able to continue exporting goods such as luxury cars and machinery that no one else could offer at the same quality level, profiting from the high growth-rates in China and the ever more unequal distribution of income in the crisis-torn United States. Moreover, the currency was fixed across the eurozone, with an exchange-rate lower than that of a purely German currency would have been. The European financial and fiscal crisis then put even greater pressure on the euro exchange rate. 14 In the nature of things, there can be no exact statistical data on the scale of a bank crisis. Even the bank that issued certain loans cannot be sure which of them are bad, and if it does know it must try to keep it secret (unless it has the option of shifting worthless securities into a state-supported ‘bad bank’). The same applies to the mutual exposure of national banking systems, about which governments and international organizations can only speculate. The published results of ‘stress tests’ conducted by national or international authorities are inherently unreliable, because the announcement of problems inevitably makes it more likely that they will develop into crises.


Britannia Unchained: Global Lessons for Growth and Prosperity by Kwasi Kwarteng, Priti Patel, Dominic Raab, Chris Skidmore, Elizabeth Truss

Airbnb, banking crisis, Carmen Reinhart, central bank independence, clockwatching, creative destruction, Credit Default Swap, demographic dividend, Edward Glaeser, eurozone crisis, fear of failure, glass ceiling, informal economy, James Dyson, Kenneth Rogoff, knowledge economy, long peace, margin call, Mark Zuckerberg, Martin Wolf, megacity, Mexican peso crisis / tequila crisis, Neil Kinnock, new economy, North Sea oil, oil shock, open economy, paypal mafia, pension reform, price stability, profit motive, Ronald Reagan, Sand Hill Road, Silicon Valley, Stanford marshmallow experiment, Steve Jobs, Walter Mischel, wealth creators, Winter of Discontent, working-age population, Yom Kippur War

Even banker bonuses remain relatively low. But while the story that Canada’s success is down to better regulation is intuitively appealing, the reality is more complicated. In many ways, Canada has less regulation than the US. Canadian banks were never banned from interstate banking, or the union of retail and investment banking. The stability of Canadian banking is also old. Canada not only escaped a banking crisis in 2008, it also avoided a A Tale of Two Nations 35 crisis in 1930 in the wake of the Wall Street crash. Earlier still, Canada was unaffected by the US banking panics of 1893 or 1930.88 There are five major Canadian banks: the Royal Bank of Canada, the Toronto Dominion Bank, the Bank of Nova Scotia, the Bank of Montreal and the Canadian Imperial Bank of Commerce. All five are located within a few hundred yards of each other in the skyscrapers of Bay Street, Toronto, not far from the shore of Lake Ontario.

McKinsey Global Institute, Debt and Deleveraging: Uneven Progress on the Path to Growth (2012). 77. http://www.guardian.co.uk/politics/2003/may/07/labour.politicalcolumnists 78. http://www.guardian.co.uk/media/1999/dec/22/bbc.futureofthenhs 79. http://www.guardian.co.uk/politics/2000/mar/17/comment.pollytoynbee 80. http://www.guardian.co.uk/society/2001/mar/08/3 81. http://www.guardian.co.uk/society/2001/nov/23/comment 82. http://blogs.ft.com/money-supply/2011/11/30/the-uk-hangover-getsworse/#axzz1h5FjxNF3 83. http://www.economist.com/node/18719530 84. International Monetary Fund, World Economic Outlook Database (April 2011). 85. http://www.economist.com/node/18719530 86. http://www.imf.org/external/np/ms/2009/030909a.htm 87. http://www.economist.com/node/16060113 88. Michael Bordo, Angela Redish and Hugh Rockoff, Why Didn’t Canada Have a Banking Crisis in 2008 (or in 1930, or in 1907, or in 1983) (2010). 89. http://www.economist.com/node/16060113 90. http://www.ft.com/cms/s/0/db2b340a-0a1b-11df-8b23-00144feabdc0. html#axzz1oEUdacsd 91. http://www.ft.com/cms/s/0/75b43310-ebee-11de-930c-00144feab49a. html#axzz1nrHw5tUL 92. Heritage Foundation, Index of Economic Freedom (2011). Notes 121 93. Cato Institute, Economic Freedom of the World (2011). 94. http://www.oecd.org/dataoecd/54/12/46643496.pdf Chapter 3 1. http://www.theatlantic.com/magazine/archive/2011/07/the-world-8217-sschoolmaster/8532/2/ 2. http://www.theatlantic.com/magazine/archive/2011/07/the-world-8217-sschoolmaster/8532/2/ 3. http://www.goethe.de/wis/fut/dos/gdw/sla/en2528036.htm 4. http://www.aicgs.org/publication/why-is-there-no-pisa-shock-in-the-u-s-acomparison-of-german-and-american-education-policy/ 5. http://www2.ed.gov/pubs/NatAtRisk/risk.html 6. http://voices.washingtonpost.com/answer-sheet/school-turnaroundsreform/ how-ronald-reagan-affected-tod.html 7. http://www.theatlantic.com/magazine/archive/2011/07/the-world-8217-sschoolmaster/8532/2/ 8. http://www.theatlantic.com/magazine/archive/2011/07/the-world-8217-sschoolmaster/8532/2/ 9. http://www.oecd.org/document/53/0,3746,en_32252351_32235731_ 38262901_1_1_1_1,00.html 10. http://www.theatlantic.com/magazine/archive/2011/07/the-world-8217-sschoolmaster/8532/2/ 11. http://www.nytimes.com/2003/02/07/news/07iht-schools_ed3_. html?

Labor Market: Implications for Employment and Earnings (Center for American Progress and the Hamilton Project, 2010). Balls, Edward, Euro-Monetarism: How Britain was Ensnared and How it Should Escape (Fabian Society, 1992). Blanden, Jo, and Stephen Machin, Recent Changes in Intergenerational Mobility in Britain (Centre for Economic Performance, 2007). Bordo, Michael D., Angela Redish and Hugh Rockoff, Why Didn’t Canada have a Banking Crisis in 2008 (or in 1930, or in 1907, or in 1983) (2010). Bourgon, Jocelyn, Program Review: The Government of Canada’s Experience Eliminating the Deficit, 1994–99: A Canadian Case Study (Institute for Government, 2009). Bradshaw, Jenny, et al., PISA 2009: Achievement of 15-Year-Olds in England (NFER, 2010). Brinkley, Ian, Manufacturing and the Knowledge Economy (The Work Foundation, 2009). BVCA, Benchmarking UK Venture Capital to the US and Israel: What Lessons can be Learned?


pages: 566 words: 155,428

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

"Robert Solow", Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, banks create money, break the buck, 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, money market fund, 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

Here Bernanke and Paulson disagreed, perhaps reflecting the differing mind-sets of a nonpolitical former economics professor and a Wall Street deal maker thrust into a political world. Their disagreement turned out to be incredibly ironic. The intellectual Federal Reserve chairman favored injecting capital directly into banks. An expert on economic history, Bernanke knew that publicly provided capital almost inevitably follows in the wake of a banking crisis. Besides, providing banks with new capital should leverage the government’s money. At least in theory, each $1 of additional bank capital should support $10 or so of renewed lending. (We’ll come back to that fallacious reasoning shortly.) Many financial market experts such as the famed investor George Soros and noted economists Paul Krugman and Joseph Stiglitz also urged that alternative. But the less cerebral, more action-oriented Treasury secretary overruled Bernanke on both political and market grounds.

By guaranteeing essentially all bank liabilities in September 2008, and subsequently assuming those debts as its own, the Irish government added about 40 points to its debt-to-GDP ratio. In theory, the Irish government was a highly creditworthy borrower that could obtain credit on favorable terms and shoulder the debt burden while Irish banks recovered. In practice, Ireland’s rash actions turned a banking crisis into a sovereign debt crisis. Ireland’s annual government budget deficit in 2010 was a shocking 32 percent of GDP, likely setting a modern-day world record. CRISES HERE AND THERE: DIFFERENCES So much for similarities. There are also numerous differences, most of them stemming from the fact that the seventeen countries of the eurozone share a common currency and a common central bank—but not a common government.

But it did worry about a potential breakup of the euro, which would presumably send a new deutsche mark soaring through the roof, thereby killing German exports. It began to look like the famous old cliché applied to the euro: You can’t live with it, and you can’t live without it. DON’T BANK ON IT So far, I have followed common usage by referring to the mess in Europe as the sovereign debt crisis. Investors are worried about the ability of several European governments to pay their bills. But it is also a European banking crisis: Investors are worried about the solvency of many of Europe’s largest banks. Indeed, the two crises are inextricably linked. Part of the governments’ debt problems derive from the expense of bailing out their banks. Europe’s major banks also own a great deal of government debt, on which they can ill afford to take losses. Furthermore, the line between banks and governments is blurrier in Europe than it is here.


pages: 475 words: 155,554

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

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, Boris Johnson, 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, G4S, ghettoisation, global rebalancing, global reserve currency, hiring and firing, inflation targeting, Irish property bubble, Just-in-time delivery, labour market flexibility, light touch regulation, 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, Myron Scholes, negative equity, North Sea oil, Northern Rock, offshore financial centre, open economy, paradox of thrift, Pearl River Delta, pension reform, price mechanism, price stability, profit motive, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, reshoring, Right to Buy, 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, WikiLeaks, working-age population, zero-sum game

Plans were made for flying in money to embassies to distribute to holiday islands, and even for the evacuation of tourists from the Greek islands. German tourists pulled their holiday bookings. In London, the Eurozone Contingency Committee sat at the Treasury, featuring Mervyn King, Adair Turner and cabinet ministers William Hague and Vince Cable, chaired by Chancellor George Osborne. ‘Throughout 2011–12 we were very worried about the Eurozone precipitating a UK financial banking crisis again: we created an emergency committee on Eurozone contingency planning, which for a while was meeting every other week, even every week.’ Strikingly, German politicians and leading members of the ECB popped up in the days after the inconclusive May election to say that a Grexit would be ‘manageable’, as it would ‘do more harm to Greeks than the Eurozone’. But the more Greece’s hard-left parties were attacked from abroad – and by the discredited mainstream parties in Athens – the more popular they became.

But this year, British ministers, including the chancellor, were only to be filmed indoors, with not a flake of snow in view. ‘The fall in GDP according to the Office for National Statistics was caused by the very bad weather,’ Osborne insisted. ‘But David Cameron and I would like the GDP figure to be stronger, even without the snow. The truth is that we always said it would be a challenging recovery. We’ve had the deepest recession of our lifetime, the biggest banking crisis since the 1930s. There is a new government trying to sort out this mess. It was always going to be choppy.’ I asked him whether he would alter his plan if the negative trend continued. ‘I’m not in the business of speculation,’ he replied. ‘I look at the central forecast for the British economy, which is for sustained growth and for rising employment. And to make sure we take advantage of that by not going back into the financial danger zone I found when I came to office.

Hauksson’s biggest scalp was Larus Welding, the ex-chief executive of Glitnir, who, together with one of his colleagues, was sentenced to two months’ jail for a fraud involving a loan to a Glitnir shareholder. (Welding is appealing this.) Another case, still to be heard, questions Kaupthing’s emergency pre-collapse cash call from the Gulf in September 2008. The money for the purchase by a Qatari sheikh of a large stake in Kaupthing ultimately came from a bank in Iceland called… Kaupthing. The charge is that the bank lent the money to instil confidence in itself just ahead of the massive bank crisis. It is certainly documented that the companies connected to Qatari investors were granted large loans by Kaupthing around the same time as buying a 5 per cent stake in the bank. The defendants in the case deny the charges. But whatever happens to Hauksson’s cases, the process has been instructive. The excesses of Icelandic financiers are seared onto the national consciousness, and the special prosecution process is now tattooing it on their foreheads.


pages: 92

The Liberal Moment by Nick Clegg, Demos (organization : London, England)

banking crisis, credit crunch, failed state, housing crisis, income inequality, mass immigration, mass incarceration, Right to Buy, smart grid, too big to fail, Winter of Discontent

What is particularly worrying is that we know from past experience how long it takes for unemployment to fall significantly: in the 1990s, it took seven years for unemployment to return to pre-recession levels. And however long this recession may last one thing is already certain: we will be left with a legacy of massive public debt and the enormous challenge of eradicating a structural deficit that could be as high as 10 per cent of GDP. Britain is, of course, not alone. The whole world’s economy has suffered an enormous shock stemming from the credit crunch and banking crisis. It would be wrong to pretend that Britain is not suffering, in part, as a consequence of this global recession. However much political opponents may like to blame problems on the government of the day, it is only fair to acknowledge that Britain’s problems are not all home-grown. The British Treasury could not have prevented the collapse of the US housing market, the collapse of the Icelandic financial system or the failure of Lehman Brothers.

Britain can have, and should have, a global hub for international finance in the City of London. But those who invest in these high-risk products should not expect any more protection than punters in betting shops and casinos. 41 Banking should be the servant of the economy, not its master. Liberal Democrats have long argued that politicians should not be in thrall to the money centre of the City, but support diverse, local banking infrastructure instead. In the aftermath of the banking crisis, now is the time to make this change – something Liberal Democrat and other councils are already doing by establishing or supporting credit unions. But we can go further. We should be using the taxpayer’s stake to break up the big banks so that we can rebuild the kind of local banking and lending infrastructure that is effective in Germany and the USA, but which has been allowed to dwindle here.


pages: 424 words: 121,425

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

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, disruptive innovation, 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

And so it is that federal and state governments have engaged in a frustrating game of whack-a-mole to ban the unscrupulous practices of payday lenders and the like. These lenders skillfully avert new rules by creating new products, crossing state lines, or escaping to do business from Native American reservations. They cannot be regulated away because the payday lending industry is doing what any successful business does: filling a market need. One solution to our present-day banking crisis is to reinvigorate or replicate local banks and cooperatives so that they can again do what they did successfully for many years—overcome the costs of lending to the poor through a tight-knit membership with mutual ownership. Over the past several decades, nearly all of the government and industry initiatives aimed at financial inclusion have focused on community efforts to bank the poor—Jefferson’s localism still runs deep in banking politics.

Unfazed by the largest banks’ opposition to his proposed reforms, Roosevelt used the public’s anger at the banks and the unit bankers’ support to catalyze the legislature to pass these measures.80 In President Roosevelt’s famous inauguration speech, he justified this broad-reaching legislation. When he told the public that “the only thing we have to fear is fear itself,” he was addressing the irrational bank runs that turned the tough economic times into an unprecedented banking crisis. He acknowledged the people’s suffering and placed blame directly at the foot of the bankers: The rulers of the exchange of mankind’s goods have failed, through their own stubbornness and their own incompetence, have admitted their failure, and abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men.… Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence.

The Glass-Steagall Act, the pillar of the New Deal banking reforms, thus entrenched the doctrine of “separation of banking and commerce” in U.S. banking regulation.82 The act also contained interest rate limits—the amount a bank could offer for deposits—intended to deter competition among banks. Reduced competition, it was believed, would lead to a more dispersed banking sector and more credit availability. These reforms were a response to the recent banking crisis, but they also revealed a Jeffersonian and Brandeisian disdain for concentrated bank power. Although they were intended to make banks safer, they were also meant to limit banks’ market reach and power. A few policymakers were convinced that too much bank power and concentration caused the Great Depression, although the conclusion has since been contested.83 Brandeis, Roosevelt, and Carter Glass—much like their Populist predecessors—saw bank power as one of the great social problems of the day.


pages: 74 words: 19,580

The 99.998271% by Simon Wood

banking crisis, clean water, drone strike, equal pay for equal work, Julian Assange, Occupy movement, offshore financial centre, Steve Jobs, WikiLeaks

If a true Democrat, someone who is not a Wall Street pawn, someone who is popular and has no skeletons in the closet, were to challenge Obama for the Democratic nomination, and if that person ran on a platform (with cast-iron promises) of ending the wars, cutting military spending, taking money out of politics, closing down the NSA database, ending the drone program, bringing the CIA and the Pentagon under control, restoring all guarantees of human rights (including the abolition of indefinite detention), social justice, transparency of government, reversing deregulation of the financial industries, retroactive justice for everyone responsible for bringing about the Iraq War and the 2008 banking crisis, electoral reform, and all the other things peace-loving people actually want, Obama and any Republican candidate would have a serious problem on their hands. In the next election, as the current Republican candidates are one and all almost unelectable, even such a true 42 Democrat could win. This could never happen, because both parties are controlled by their financial benefactors, but it would be an interesting experiment, as the media and all other instruments of the corporate elites which ensure the status quo is maintained would be forced to fire at such a person with all guns blazing, just as they are doing with the Occupy movement.

Cost The deep reach of the internet into almost every home in developed countries around the world has removed the problem of cost, always the main obstacle to direct democracy in the past. Past Attempts It is true that past experiments with direct democracy have failed, but there could be many reasons for this. The Direct Democracy Party of New Zealand existed from 2005 to 2009, partly as a reaction to the banking crisis and mounting national debt. Thirty-two party members stood as candidates in the 2005 elections but only pulled in 782 votes, 0.03% of the electorate. This failure could be due to a lack of public recognition of (and media 57 disinterest in) the candidates and the party itself, as well as distrust of such a new and radical political entity. At that time, three years before the 2008 financial crisis, fears for the national and global economy among the population were not as widespread as they are now.


pages: 553 words: 168,111

The Asylum: The Renegades Who Hijacked the World's Oil Market by Leah McGrath Goodman

anti-communist, Asian financial crisis, automated trading system, banking crisis, barriers to entry, Bernie Madoff, computerized trading, corporate governance, corporate raider, credit crunch, Credit Default Swap, East Village, energy security, Etonian, family office, Flash crash, global reserve currency, greed is good, High speed trading, light touch regulation, market fundamentalism, peak oil, Peter Thiel, pre–internet, price mechanism, profit motive, regulatory arbitrage, reserve currency, rolodex, Ronald Reagan, side project, Silicon Valley, upwardly mobile, zero-sum game

Wendy and Phil Gramm—The free-market husband-and-wife team who helped pave the way for the infamous Enron loophole—Dr. Wendy Gramm as head of the Commodity Futures Trading Commission under Reagan and Phil Gramm as a prominent senator from Texas. Brooksley Born—The Stanford-educated lawyer and head of the Commodity Futures Trading Commission under Clinton in 1996 who was credited with foreseeing the global banking crisis that would tear Wall Street asunder. Played a major role in ousting Guttman from his position as Nymex chairman. Dr. James Newsome—Former strawberry and cattle farmer who, in 2001, was named head of the Commodity Futures Trading Commission, only to resign three years later to become Nymex president, CEO, and Schaeffer’s right-hand man. Greg Mocek—Head of the enforcement division at the Commodity Futures Trading Commission under Newsome, investigating Enron and the Nymex trading pits before resigning in 2008, just as global oil prices spiked to nearly $150 a barrel and plunged toward $30 days later.

I just wanted to keep us from being exposed to more financial hell. I was going on pure adrenaline. Magid’s dad came in from Long Island to make sure he didn’t crack up. I was scared. I kept asking him every day, ‘Are you still liquidating?’ We met with Phibro to see if they would take it. They said no. I didn’t know how to trade myself out of this stuff. It was like dealing with the toxic assets of the banking crisis. It takes the asshole who got you into the mess to get you out of it.” It took Magid three months to sell off the options contracts. He finally exited the positions at a loss of $500,000, a testament to his trading skills. Losing hundreds of thousands of dollars hurt, but it was a pain Guttman could live with. Anything was better than blowing through more than $7 million in just a few days.

They were still allowed to place massive bets on a disappearing commodity with almost no money down, a circumstance that could have been prevented by Congress when it had the chance to vote on it in July 2008, just a few days after oil prices topped out. But instead it scuttled the measure. In the end, lawmakers were content to chastise Big Oil on TV. The truth of the matter was, when the power was in their hands, they could do nothing but waffle. On Wall Street, the devastation of the banking crisis had not chastened anyone who hadn’t lost their job. Traders, bankers, and lawyers were already walking around saying that nothing, in fact, had really happened. The meltdown, apparently, was only pro forma, a figment of everyone’s imagination. And they were even starting to believe it. After all, appearance was truth. “All this goes to show we are now entering the second phase of the world financial crisis,” a reader wrote in the comments section of the Wall Street Journal’s Web site.


pages: 566 words: 163,322

The Rise and Fall of Nations: Forces of Change in the Post-Crisis World by Ruchir Sharma

Asian financial crisis, backtesting, bank run, banking crisis, Berlin Wall, Bernie Sanders, BRICs, business climate, business cycle, business process, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, centre right, colonial rule, Commodity Super-Cycle, corporate governance, creative destruction, crony capitalism, currency peg, dark matter, debt deflation, deglobalization, deindustrialization, demographic dividend, demographic transition, Deng Xiaoping, Doha Development Round, Donald Trump, Edward Glaeser, Elon Musk, eurozone crisis, failed state, Fall of the Berlin Wall, falling living standards, Francis Fukuyama: the end of history, Freestyle chess, Gini coefficient, hiring and firing, income inequality, indoor plumbing, industrial robot, inflation targeting, Internet of things, Jeff Bezos, job automation, John Markoff, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, knowledge economy, labor-force participation, lateral thinking, liberal capitalism, Malacca Straits, Mark Zuckerberg, market bubble, mass immigration, megacity, Mexican peso crisis / tequila crisis, mittelstand, moral hazard, New Economic Geography, North Sea oil, oil rush, oil shale / tar sands, oil shock, pattern recognition, Paul Samuelson, Peter Thiel, pets.com, plutocrats, Plutocrats, Ponzi scheme, price stability, Productivity paradox, purchasing power parity, quantitative easing, Ralph Waldo Emerson, random walk, rent-seeking, reserve currency, Ronald Coase, Ronald Reagan, savings glut, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, Simon Kuznets, smart cities, Snapchat, South China Sea, sovereign wealth fund, special economic zone, spectrum auction, Steve Jobs, The Future of Employment, The Wisdom of Crowds, Thomas Malthus, total factor productivity, trade liberalization, trade route, tulip mania, Tyler Cowen: Great Stagnation, unorthodox policies, Washington Consensus, WikiLeaks, women in the workforce, working-age population

Between 2011 and 2015 Russia witnessed strong positive net migration due to an influx of hundreds of thousands of job seekers from former Soviet Satellite states, led by Ukraine. But the increasing numbers of talented Russians leaving the country outstripped this influx. More than 180,000 Russians left in 2013, five times more than those who departed in 2009 and close to peaks reached during the banking crisis in 1998. Those leaving were entrepreneurs, writers, scientists, and the sons and daughters of families that could afford to send their children abroad to study, in the hope that they could eventually settle outside Russia. Dinner table conversation among the Russian elite dwelled on how to secure a visa to a desirable foreign country and how to get one’s money out with the family. The Chinese economy was much farther from a crisis situation than Russia’s, but my colleagues there reported similar chatter.

And China’s regular banks, as opposed to the shadow banks, looked reasonably stable—supported by very large stores of deposits, thanks to very strong domestic savings, which amounted to 50 percent of GDP, compared to a global average of about 22 percent. In short, the bulls argued, China was well positioned to pay off or forgive its own debts. The historical record casts doubt on the strength of these defenses, not only for China but for any country. Many other nations on the list of the thirty most extreme credit binges enjoyed some of the same advantages, but this did them no good. Taiwan suffered a banking crisis in 1995 despite having foreign exchange reserves that totaled 45 per cent of GDP, a slightly higher level than China had accumulated by 2014. Taiwan’s banks also appeared to hold more than ample deposits to back their loans, but that did not avert a crunch. Banking crises hit Japan in the 1970s and Malaysia in the 1990s, even though these countries had high domestic savings rates of around 40 percent of GDP, also well above the global average.

† By 2015, I should note, some private financial industry researchers were publishing pieces on the connection between credit binges and slower economic growth, including “Untangling China’s Credit Conundrum” from Goldman Sachs that January and “Keeping a Wary Eye on the EM Credit Cycle” by JP Morgan that November. ‡ In most of these cases, GDP growth was strong during the five-year period when credit was growing dangerously fast, so credit growth was the main reason the credit/GDP ratio was rising § Here I use financial crisis to mean a banking crisis as defined by Carmen Reinhart and Kenneth Rogoff in This Time Is Different (2009), which captures bank runs that force a government to close, merge, bail out, or take over one or more financial institutions. ¶ In twenty-six of the thirty cases, the average annual rate of growth fell over the next five years. The other four—Malaysia, Uruguay, Finland, and Norway—experienced a serious contraction in the economy, but the recovery came soon enough to lift the average rate of growth for the next five years


pages: 193 words: 11,060

Ethics in Investment Banking by John N. Reynolds, Edmund Newell

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, banking crisis, collapse of Lehman Brothers, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, discounted cash flows, financial independence, index fund, invisible hand, light touch regulation, margin call, moral hazard, Nick Leeson, Northern Rock, quantitative easing, shareholder value, short selling, South Sea Bubble, stem cell, the market place, The Wealth of Nations by Adam Smith, too big to fail, zero-sum game

The US Financial Crisis Inquiry Commission blamed failures in regulation; breakdowns in corporate governance, including financial firms acting recklessly; excessive borrowing and risk by households and Wall Street; policymakers ill-prepared for the crisis; and systematic breakdown in accountability and ethics.1 The UK’s Independent Commission on Banking cited factors including “global imbalances, loose monetary policy, light-touch regulation, declining under-writing standards, widespread mis-pricing of risk, a vast expansion of banks’ balance sheets, rapid growth in securitized assets”.2 The UK economist Roger Bootle diagnosed the crisis in a more straightforward way in his 2009 book The Trouble with Markets: “greedy bankers and naive borrowers, mistaken central banks and inept regulators, insatiable Western consumers and over-thrifty Chinese savers”.3 Others have also directly cited bankers’ greed. Gordon Brown, the UK Prime Minister at the time the financial crisis developed, in his book examining the financial crisis, Beyond the Crash, has blamed “excessive remuneration at the expense of adequate capitalisation” for the UK banking crisis.4 It is clear that incentives in the form of the high levels of pay received by investment bankers creating and trading seriously flawed products was a contributing factor to the financial crisis. The asymmetry of risk and reward in investment bankers’ remuneration can incentivise risk-taking: there is an opportunity to be paid very well if a trade is profitable, but the investment banker does not actually lose money (in the form of cash – the value of any equity owned in the investment bank can reduce) if a trade is lossmaking.

These bankruptcies were not alone, as there was a series of failures in both the telecoms/cable and the independent power producer sectors. Governments failed to appropriately increase the effectiveness of oversight of credit rating agencies in the wake of the failures of Enron, WorldCom and so on. • Sovereign debt crises and defaults are nothing new. Looking back to Latin America in the 1980s and early 1990s, and also at the impact of financial crises in major economies, such as the Russian banking crisis in 1997 or the UK in the 1970s, sovereign debt even in relatively stable countries has periodically exhibited relatively high levels of risk. Given the nature of a sovereign country, and its responsibilities (providing services such as health care, defence, education) for and from (e.g., tax raising) its citizens, the ethical position of trading in sovereign debt may have different characteristics than trading in corporate debt. • Strategies involving short-selling are not novel.

The results of this can be that the investment banker concerned is paid in excess of what is merited, but also that other investment bankers are under-remunerated. Is remuneration an ethical issue? Remuneration can be considered an ethical issue from a number of perspectives, notably relating to fairness (i.e., equity and distributive justice), and also relating to the issue discussed on p. 24 of investment banks receiving Ethical Issues – Internal 135 a “free-ride”. There is an argument that the banking crisis was caused by greed. This has been advanced by, among others, former UK Prime Minister Gordon Brown. It can be argued that the cause of the financial crisis (in the UK) was excess bank bonuses resulting in a deficiency in bank capital. This argument contends that the payment of bonuses left the banking sector short of capital, and therefore the financial crisis was (at least in part) the result of greed.


pages: 233 words: 66,446

Bitcoin: The Future of Money? by Dominic Frisby

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, ethereum blockchain, fiat currency, fixed income, friendly fire, game design, Isaac Newton, Julian Assange, land value tax, 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, QR code, quantitative easing, railway mania, Ronald Reagan, Ross Ulbricht, 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

China, for example, is the world’s second-largest economy, yet individuals may not withdraw more than $50,000 per annum from the country. The banking crisis in Cyprus in 2013 saw capital controls introduced there. Currently, cash withdrawals are limited to €300 a day, the cashing of cheques is banned and large cash transfers are vetted. Accounts with over €100,000 saw funds confiscated. Capital controls now seem to be being imposed in the Ukraine due to its current instability. Reports suggest nationals are finding it harder and harder to get their money out of Spain and other parts of impoverished Southern Europe, and the insolvency of Spain’s banks makes another banking crisis in the region look probable. The investment bank JP Morgan has declared it is ‘inevitable that capital controls and a capital freeze will be imposed’180 in Southern Europe; senior employees tell me many of their current strategies are based on this inevitability.

Innocent people are made to pay for the profligacies of their banks, their financial system or their governments. Bitcoin has been dubbed ‘money without government’ and ‘money without borders’. You can send money to another country as easily as you can an email, and nearly as instantly. There is no need to smuggle 60 Krugerrands in your pocket if you’re fleeing an oppressive regime. People are already starting to use Bitcoin in this way. When the Cypriot banking crisis hit during the spring of 2013 and fear of capital controls loomed across Southern Europe, the bitcoin price rose from about $15 to north of $200. In the latter part of 2013, the price ballooned again, rising from about $130 to over $1,000 due to Chinese interest. Much of that interest was speculative, but some of it was also money fleeing the country. Shanghai resident Zennon Kapron declared, ‘some people have the equivalent of tens of millions in dollar-equivalent value in China and they want to get it out.


pages: 305 words: 69,216

A Failure of Capitalism: The Crisis of '08 and the Descent Into Depression by Richard A. Posner

Andrei Shleifer, banking crisis, Bernie Madoff, business cycle, collateralized debt obligation, collective bargaining, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, diversified portfolio, equity premium, financial deregulation, financial intermediation, Home mortgage interest deduction, illegal immigration, laissez-faire capitalism, Long Term Capital Management, market bubble, money market fund, moral hazard, mortgage debt, Myron Scholes, oil shock, Ponzi scheme, price stability, profit maximization, race to the bottom, reserve currency, risk tolerance, risk/return, Robert Shiller, Robert Shiller, savings glut, shareholder value, short selling, statistical model, too big to fail, transaction costs, very high income

Even when interest rates are very low, there may be little demand for loans if people are already overindebted. Since, moreover, the Federal Reserve's efforts to expand or contract the money supply and so lower or raise interest rates are mediated by the banks, a breakdown in the banking system can loosen the Federal Reserve's control over the money supply, opening the way to deflation. That is why the kind of shock to the economy that comes from a banking crisis is potentially more serious than a shock created by a technological change. Increasing the money supply reduces the value of money, and so creates a threat of inflation, because, initially at least, more money is buying the same amount of goods and services. But in a depression the threat of inflation lies in the future. The immediate danger is the opposite. If a bank's equity cushion is too thin for comfort, the bank is unlikely to thin it further by converting its safest assets into risky loans —as an increased fraction of loans are bound to be during a depression —even if invited and enabled to do so by the Federal Reserve's increasing the bank's reserves.

The profession's failure to foresee the depression, and its unpreparedness to suggest timely, effective responses to it, will stimulate fresh thinking in macroeconomics and financial economics. It may even lead to a merger between depression economics, a branch of macroeconomics, and finance viewed as a distinct field of economics (much as statistics is a distinct field of mathematics). Recessions precipitated by a banking crisis are more likely than other recessions to turn into depressions because of the severe negative effect of a breakdown in the credit system on personal consumption expenditures, an effect that sets the stage for deflation. Maeroeconomists are the experts on recessions and depressions, finance theorists on the operation of the financial system. The latter were quicker to spot the storm clouds. The former are chastened not only by their failures of foresight and understanding but also by finding themselves uncertain about how to place the economy on the path to recovery.

They did this by eliminating the limits on federal deposit insurance of bank deposits and by extending that insurance to checkable accounts in money market funds, but more important by bailing out failing firms deemed "too big to fail"—an incentive for corporate giantism and financial irresponsibility (which go hand in hand because the difficulty of controlling subordinates grows with the size of an organization). The government gratuitously disrupted the operations of hedge funds by limiting short selling—at the height of the banking crisis the Securities and Exchange Commission forbade short selling of financial stocks. And by substantially increasing the federal deficit, the government's responses to the crisis are sowing the seeds of a future inflation. But of these criticisms, the main ones — the creation of moral hazard and the planting of the seeds of a future inflation—concern the unavoidable side effects of any effective measures to limit a depression.


pages: 233 words: 71,775

The Joy of Tax by Richard Murphy

banking crisis, banks create money, carried interest, correlation does not imply causation, en.wikipedia.org, failed state, full employment, Gini coefficient, high net worth, land value tax, means of production, offshore financial centre, quantitative easing, race to the bottom, savings glut, seigniorage, The Spirit Level, The Wealth of Nations by Adam Smith, transfer pricing

So, for example, taxes on carbon and other forms of pollution are charged because the emission of noxious substances imposes costs, both now and, through climate change, in the future. A similar externality that has potential impact upon the collective wealth of others is created when trading takes place through limited liability companies. If these fail the cost of their doing so falls in part on their creditors and sometimes more widely onto society at large, as the banking crisis of 2008 proved. Income recorded in a limited liability company should, as a result, be subject to higher rates of tax than are charged on income recorded in other ways. This logic of taxing generic externalities to correct market failures is not, however, the rationale for all charges of this type: taxes on tobacco, alcohol and road use do not fit within this framework. In these cases the taxes are meant to be a contribution towards the cost that the user imposes upon society by their behaviour.

accountability 179, 237 see also under HMRC accountants 69, 101–2, 114, 116, 217 accounting rules 88 Adam Smith Institute 70, 71, 134+n advisers 44, 101–2, 114–15, 153, 226 air travel 29, 176, 237 alcohol 64, 74, 191 alienation 31, 42, 65 allowances 16, 196, 199, 224 see also personal allowances Amazon 135 anarchism 156 anarchy 41 anonymity 100, 222 see also secrecy anti-avoidance principle see under tax avoidance appeals systems 118, 220 ARC (Association of Revenue and Customs) 203 Audit Office, National 205 austerity 68, 84, 90, 94–5, 102 Australia 189 Austria 146 Babylon 14–15, 22 balance 88 see also under government(s) balance of trade data 93 bank data 149, 232, 233 Bank of England 46+n, 49–52+n on banking 209, 231 on money and monetary policy 47+n, 48+n, 85–6, 208 ownership and control of 46+n, 49, 50, 51, 209 on savings and investment 48+n, 230–1 bank transactions, proposed tax on 188, 190, 194, 232–3, 236, 237 see also financial transactions tax bankers 69, 102, 217 banking crisis and crash (2008) 78, 79–80, 191 banks and banking 48–9, 50, 174, 181–2, 187, 209 and money creation 47–8, 208, 214 base rate (bank rate) 52n, 58 bedroom tax 235 Belgium 32 beliefs 39–40, 46n, 53 benefits systems 191–2 see also welfare benefits Bermuda 124, 135 Bible, references to taxation in 15, 16 Boston Tea Party 22, 64 Brazil 188–9 Budget Responsibility, Office for 205 Buffett, Warren 225 Buiter, Willem 78 burden of proof 196, 217, 224 burglary 36, 44 businesses assets 184 investment by 89, 92–3, 199 and tax on transactions 190 see also companies Butler, Eamonn 71 Cairns, Lord 111–12 Cameron, David 82 capital gains 182, 184, 224–6 capital gains tax 29, 31, 73, 224–6, 227, 228 capping council tax 30, 227 flat taxes and 75, 76, 78–9 carbon usage 190, 191, 233 Carney, Mark 83n Carville, James 23 case law 111–12 Cayman Islands 124 Center for Freedom and Prosperity 134 central banks 49, 53 see also Bank of England certainty 130–1 charities 42 Charter of Liberties 17, 22 child credits 235 children 192–3 CIA Factbook 34 citizen’s income 192–5 City of London 18–19, 187 climate change 63, 191, 233 climate change levy 237 Clinton, Bill 23 common law 153 Community Charge 33, 37, 186 see also poll taxes companies 138, 150, 184, 191 accounts, and taxation 198–9 beneficial ownership of 124, 149, 221–2 close 233–4 country-by-country reporting 124–7, 151, 201, 222 excess profits tax 200–1, 234 flat tax proposals and 73 and information exchange 184 large 100, 200, 204, 234 location and taxation 163, 197–8 multinational 124–7, 150–2, 198, 201, 222 real existence 40, 42 self-employment and 167, 168, 173 small 173, 198, 234 submission of accounts and tax returns 98–9, 221–2, 223 and UK residence rules 222–3 compliance 33–4, 35, 37, 146, 148 compulsion 31, 32, 35–8 conflict 16, 17, 19–21, 25, 37 consent 25–6, 32–8 Conservative Party 94 consultation 114–15, 218, 237 consumption, excessive, tax and 139, 176, 189–90, 233, 238 convenience 130–1 corporation tax 29, 109, 161, 233, 234 corruption 148–9, 204 council tax 29, 30, 31, 186, 227 country-by-country reporting see under companies courts 33, 39, 112, 153, 154 crash and banking crisis (2008) 78, 79–80, 83, 191 credit 57, 231 credits and debits 47, 88, 208 cross-subsidization 166 currency/currencies 55–6 see also money customs duties 14, 16, 119–20 CUT (carbon usage tax), proposed 190, 233 Daily Telegraph 28, 30, 36 Darling, Alistair 76 data access to for tax authorities 149–50, 201–2 automatic information exchange of 123–4, 127, 184 death, taxation and 13, 15, 226, 227 see also inheritance taxes debits and credits 47, 88, 208 debt 50–2, 213 trading 46+n, 50 see also loans decision-making 38, 106, 108, 115–16, 121, 128–9 default 196, 217 deficit spending 58, 215 see also government spending democracy 26, 27, 31, 32, 37, 38 and accountability 118 and consensus 44 influencing 31, 37 opposition to 41–2, 70–1, 78–9, 80, 84, 102–3 see also representation Department for International Development 110 Department of Taxation, proposed 219–21, 227 Devereux, Michael 109 devolution 115, 162–6 Dickens, Charles 86n disability benefits 192, 194 dividends 138, 168, 223, 231 Domesday Book 17 domicile, taxation and 197, 222 double-entry accounting 88 drugs trade 56 economics textbooks 48+n, 85–6 economy 58, 167–8, 210 effects of unemployment on 83 intervention following 2008 crash 79–80, 83 relationship to money and tax 88 reorganizing, taxation and 57–62, 66 sectors 87–8 sustainability 57 see also government(s) and growth education 102, 106–8, 158 efficiency 54–5, 130–1, 160–1 employment full 57, 158, 171, 215 issues concerning 83, 89, 167, 168, 172, 173 energy sources 63, 237 enterprise 136–7, 173, 225, 234 environmental issues 31, 63, 143, 176, 190–1, 233, 237 equity/equality 129–31, 137–45, 211, 212, 215 see also flat taxes and inequality equivalence 144 European Commission 151–2 European Parliament 65, 151 European Union 124, 126, 223, 237 expenses 196 exports 88 externalities 63–4, 190–1 feedback on effectiveness of tax decisions 108, 112 financial services 143, 174 see also banks and banking Financial Times 109 financial transactions information on 197, 201 volume destabilizing economy 188 financial transactions tax, proposed 187–9, 236 fiscal policy 58–60, 82–3, 104–5 flat taxes 68–80, 161 Franklin, Benjamin 13, 14 French revolution 23–4 fuel duties 30, 74 future generations, tax and 143, 176 Galbraith, J.

accountability 179, 237 see also under HMRC accountants 69, 101–2, 114, 116, 217 accounting rules 88 Adam Smith Institute 70, 71, 134+n advisers 44, 101–2, 114–15, 153, 226 air travel 29, 176, 237 alcohol 64, 74, 191 alienation 31, 42, 65 allowances 16, 196, 199, 224 see also personal allowances Amazon 135 anarchism 156 anarchy 41 anonymity 100, 222 see also secrecy anti-avoidance principle see under tax avoidance appeals systems 118, 220 ARC (Association of Revenue and Customs) 203 Audit Office, National 205 austerity 68, 84, 90, 94–5, 102 Australia 189 Austria 146 Babylon 14–15, 22 balance 88 see also under government(s) balance of trade data 93 bank data 149, 232, 233 Bank of England 46+n, 49–52+n on banking 209, 231 on money and monetary policy 47+n, 48+n, 85–6, 208 ownership and control of 46+n, 49, 50, 51, 209 on savings and investment 48+n, 230–1 bank transactions, proposed tax on 188, 190, 194, 232–3, 236, 237 see also financial transactions tax bankers 69, 102, 217 banking crisis and crash (2008) 78, 79–80, 191 banks and banking 48–9, 50, 174, 181–2, 187, 209 and money creation 47–8, 208, 214 base rate (bank rate) 52n, 58 bedroom tax 235 Belgium 32 beliefs 39–40, 46n, 53 benefits systems 191–2 see also welfare benefits Bermuda 124, 135 Bible, references to taxation in 15, 16 Boston Tea Party 22, 64 Brazil 188–9 Budget Responsibility, Office for 205 Buffett, Warren 225 Buiter, Willem 78 burden of proof 196, 217, 224 burglary 36, 44 businesses assets 184 investment by 89, 92–3, 199 and tax on transactions 190 see also companies Butler, Eamonn 71 Cairns, Lord 111–12 Cameron, David 82 capital gains 182, 184, 224–6 capital gains tax 29, 31, 73, 224–6, 227, 228 capping council tax 30, 227 flat taxes and 75, 76, 78–9 carbon usage 190, 191, 233 Carney, Mark 83n Carville, James 23 case law 111–12 Cayman Islands 124 Center for Freedom and Prosperity 134 central banks 49, 53 see also Bank of England certainty 130–1 charities 42 Charter of Liberties 17, 22 child credits 235 children 192–3 CIA Factbook 34 citizen’s income 192–5 City of London 18–19, 187 climate change 63, 191, 233 climate change levy 237 Clinton, Bill 23 common law 153 Community Charge 33, 37, 186 see also poll taxes companies 138, 150, 184, 191 accounts, and taxation 198–9 beneficial ownership of 124, 149, 221–2 close 233–4 country-by-country reporting 124–7, 151, 201, 222 excess profits tax 200–1, 234 flat tax proposals and 73 and information exchange 184 large 100, 200, 204, 234 location and taxation 163, 197–8 multinational 124–7, 150–2, 198, 201, 222 real existence 40, 42 self-employment and 167, 168, 173 small 173, 198, 234 submission of accounts and tax returns 98–9, 221–2, 223 and UK residence rules 222–3 compliance 33–4, 35, 37, 146, 148 compulsion 31, 32, 35–8 conflict 16, 17, 19–21, 25, 37 consent 25–6, 32–8 Conservative Party 94 consultation 114–15, 218, 237 consumption, excessive, tax and 139, 176, 189–90, 233, 238 convenience 130–1 corporation tax 29, 109, 161, 233, 234 corruption 148–9, 204 council tax 29, 30, 31, 186, 227 country-by-country reporting see under companies courts 33, 39, 112, 153, 154 crash and banking crisis (2008) 78, 79–80, 83, 191 credit 57, 231 credits and debits 47, 88, 208 cross-subsidization 166 currency/currencies 55–6 see also money customs duties 14, 16, 119–20 CUT (carbon usage tax), proposed 190, 233 Daily Telegraph 28, 30, 36 Darling, Alistair 76 data access to for tax authorities 149–50, 201–2 automatic information exchange of 123–4, 127, 184 death, taxation and 13, 15, 226, 227 see also inheritance taxes debits and credits 47, 88, 208 debt 50–2, 213 trading 46+n, 50 see also loans decision-making 38, 106, 108, 115–16, 121, 128–9 default 196, 217 deficit spending 58, 215 see also government spending democracy 26, 27, 31, 32, 37, 38 and accountability 118 and consensus 44 influencing 31, 37 opposition to 41–2, 70–1, 78–9, 80, 84, 102–3 see also representation Department for International Development 110 Department of Taxation, proposed 219–21, 227 Devereux, Michael 109 devolution 115, 162–6 Dickens, Charles 86n disability benefits 192, 194 dividends 138, 168, 223, 231 Domesday Book 17 domicile, taxation and 197, 222 double-entry accounting 88 drugs trade 56 economics textbooks 48+n, 85–6 economy 58, 167–8, 210 effects of unemployment on 83 intervention following 2008 crash 79–80, 83 relationship to money and tax 88 reorganizing, taxation and 57–62, 66 sectors 87–8 sustainability 57 see also government(s) and growth education 102, 106–8, 158 efficiency 54–5, 130–1, 160–1 employment full 57, 158, 171, 215 issues concerning 83, 89, 167, 168, 172, 173 energy sources 63, 237 enterprise 136–7, 173, 225, 234 environmental issues 31, 63, 143, 176, 190–1, 233, 237 equity/equality 129–31, 137–45, 211, 212, 215 see also flat taxes and inequality equivalence 144 European Commission 151–2 European Parliament 65, 151 European Union 124, 126, 223, 237 expenses 196 exports 88 externalities 63–4, 190–1 feedback on effectiveness of tax decisions 108, 112 financial services 143, 174 see also banks and banking Financial Times 109 financial transactions information on 197, 201 volume destabilizing economy 188 financial transactions tax, proposed 187–9, 236 fiscal policy 58–60, 82–3, 104–5 flat taxes 68–80, 161 Franklin, Benjamin 13, 14 French revolution 23–4 fuel duties 30, 74 future generations, tax and 143, 176 Galbraith, J.


pages: 109 words: 33,946

Tribe: On Homecoming and Belonging by Sebastian Junger

banking crisis, Credit Default Swap, Ferguson, Missouri, financial independence, income inequality, Paul Samuelson, RAND corporation, Yom Kippur War

Business Insider, January 23, 2013. http://www.businessinsider.com/why-wall-street-execs-werent-prosecuted-2013-1. Grinnell, G. B. “The Cheyenne Medicine Lodge.” American Anthropologist, New Series, 16, no. 2 (1914): 245–56. Holland, Joshua. “Hundreds of Wall Street Execs Went to Prison During the Last Fraud-Fueled Bank Crisis.” Moyers & Company, September 17, 2013. http://billmoyers.com/2013/09/17/hundreds-of-wall-street-execs-went-to-prison-during-the-last-fraud-fueled-bank-crisis/. “Home Foreclosure Rates Are Comparable to the Great Depression.” Washington’s Blog, May 7, 2013. http://www.washingtonsblog.com/2013/05/have-more-people-lost-their-homes-than-during-the-great-depression.html. Kiel, Paul, and Dan Nguyen. “The State of the Bailout.” ProPublica. https://projects.propublica.org/bailout/.


pages: 350 words: 109,220

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

Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, Berlin Wall, Black Swan, break the buck, business cycle, central bank independence, credit crunch, Credit Default Swap, crony capitalism, debt deflation, Fall of the Berlin Wall, financial innovation, financial intermediation, fixed income, full employment, George Akerlof, housing crisis, inflation targeting, information asymmetry, London Interbank Offered Rate, Long Term Capital Management, market bubble, money market fund, 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

“Crowds cheered when he walked down Wall Street, and world political leaders and bankers sent telegrams expressing their awe that one man had been able to do that,” one of his biographers, Jean Strouse, told an interviewer. “But the next minute a democratic nation was really quite horrified at the idea that one man had this much power.” Republican senator Nelson Aldrich of Rhode Island, who was among Wall Street’s best friends in Washington, put the matter more practically: “Something has got to be done. We may not always have Pierpont Morgan with us to meet a banking crisis.” The idea of a centralized monetary authority was hardly novel. The Bank of England had been around since 1694, and as early as the mid-nineteenth century had developed the practice of printing cash and lending it to smaller banks at times of crisis. This “lender of last resort” role for central banks was codified by British journalist and economist Walter Bagehot in his 1873 book, Lombard Street.

Although not nearly as quotable and thus not as prominent as some other presidents, Rosengren emerged as a thoughtful, low-profile Bernanke ally during the Great Panic. He and the Richmond Fed’s Jeff Lacker had gone to the same New Jersey high school, although they didn’t know each other then, and were graduate students in economics at the same time at the University of Wisconsin. Rosengren began his Fed career in the Boston Fed’s research department, focusing for a time on the credit crunch and banking woes of New England in the 1990s as well as Japan’s banking crisis. In 2000, he moved into the nitty-gritty of bank supervision and regulation, an unusual move for a Ph.D. economist but one that gave him highly relevant expertise during the Great Panic and a clear view that some fellow bank presidents lacked. Where others saw signs of hope, Rosengren saw “a deteriorating housing sector, slowing consumer and business spending, high energy prices, and ill-functioning financial markets.”

The Fed could no longer cope with the Great Panic by itself. Based on his years of studying previous financial collapses and telephone conversations with his Swedish and Japanese counterparts who had coped with recent banking crises, Bernanke had suspected for months that he and Paulson would eventually end up asking Congress to spend substantial sums of taxpayer money to rescue the banks. In every major banking crisis he had studied, the government had had to put capital into the banks, take bad loans off the banks’ books, and guarantee the banks’ debts. So far, Bernanke had deferred to Paulson on the timing of going to Congress, while Paulson had been reluctant to propose anything that Congress might, in an election year, reject. Bernanke and Geithner saw this as the inevitable and costly politics of responding to banking crises in a democracy.


pages: 124 words: 39,011

Beyond Outrage: Expanded Edition: What Has Gone Wrong With Our Economy and Our Democracy, and How to Fix It by Robert B. Reich

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, affirmative action, banking crisis, business cycle, carried interest, collateralized debt obligation, collective bargaining, Credit Default Swap, credit default swaps / collateralized debt obligations, desegregation, full employment, Home mortgage interest deduction, job automation, Mahatma Gandhi, minimum wage unemployment, money market fund, Nelson Mandela, new economy, Occupy movement, offshore financial centre, plutocrats, Plutocrats, Ponzi scheme, race to the bottom, Ronald Reagan, single-payer health, special drawing rights, The Wealth of Nations by Adam Smith, Tim Cook: Apple, too big to fail, trickle-down economics, women in the workforce, working poor, zero-sum game

In May 2012, Jamie Dimon, chairman and CEO of JPMorgan Chase, the nation’s largest bank by assets, announced the bank had lost $2 billion to $3 billion in trades because of excessively risky bets that were “poorly executed” and “poorly monitored,” the result of “many errors,” “sloppiness,” and “bad judgment.” But not to worry, said Dimon. “We will admit it, we will fix it and move on.” Ever since the start of the banking crisis in 2008, Dimon had been arguing that more government regulation of Wall Street was unnecessary. In 2011 he vehemently and loudly opposed the so-called Volcker Rule, itself a watered-down version of the old Glass-Steagall Act—the Depression-era law that had separated investment banking (betting in the financial casino) from commercial banking (taking in deposits and lending them out). Glass-Steagall’s repeal in 1999 had allowed bankers to place large bets with other people’s money—and make huge windfalls for themselves.

By the time of Dimon’s announcement of JPMorgan’s trading losses, the rule had morphed into almost three hundred pages of regulatory mumbo jumbo and still hadn’t been finalized. In light of all this, Dimon’s promise in May 2012, after revealing billions of dollars of losses from risky trades, that JPMorgan would “fix it and move on” was not reassuring. Here we were—less than four years after a banking crisis had forced American taxpayers to bail out the Street, caused home values to plunge by more than 30 percent and pushed millions of homeowners underwater, threatened or diminished the savings of millions more, and sent the entire American economy hurtling into the worst downturn since the Great Depression—and JPMorgan recapitulated the whole debacle with the same kinds of errors, sloppiness, and bad judgment, and the same excessively risky, poorly executed, and poorly monitored trades, that had caused the crisis in the first place.


pages: 304 words: 80,965

What They Do With Your Money: How the Financial System Fails Us, and How to Fix It by Stephen Davis, Jon Lukomnik, David Pitt-Watson

activist fund / activist shareholder / activist investor, Admiral Zheng, banking crisis, Basel III, Bernie Madoff, Black Swan, buy and hold, centralized clearinghouse, clean water, computerized trading, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crowdsourcing, David Brooks, Dissolution of the Soviet Union, diversification, diversified portfolio, en.wikipedia.org, financial innovation, financial intermediation, fixed income, Flash crash, income inequality, index fund, information asymmetry, invisible hand, Kenneth Arrow, Kickstarter, light touch regulation, London Whale, Long Term Capital Management, moral hazard, Myron Scholes, Northern Rock, passive investing, performance metric, Ponzi scheme, post-work, principal–agent problem, rent-seeking, Ronald Coase, shareholder value, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, Steve Jobs, the market place, The Wealth of Nations by Adam Smith, transaction costs, Upton Sinclair, value at risk, WikiLeaks

That is why the day you get married is so memorable. In fact, the elements of that day are not likely to be present in the sample of any of the previous 3,652 days.28 So how could the computer possibly calculate the likelihood of their recurring tomorrow, or next week? Similarly, in the financial world, if you feed a statistical model data that have come from a period where there has been no banking crisis, the model will predict that it is very unlikely you will have a banking crisis. When statisticians worked out that a financial crisis of the sort we witnessed in 2008 would occur once in billions of years, their judgment was based on years of data when there had not been such a crisis.29 It compounds the problem that people tend to simplify the outcome of risk models. For example, many people take comfort in the idea of a 95 percent probability that their maximum loss is predicted to be less than 10 percent in any particular year.

You’ve told me it is important that the finance industry works, but how can you know it works well? Are you comfortable that all these giant buildings are the result of the success of the industry, and not perhaps the result of someone taking some of your money for their own advantage? Are you sure that this very complicated industry is the best way to create those services you say are so important? What about that banking crisis you mentioned, where it looked as though the whole system would collapse? How did that come about?” He’s not done. Walking past one of the many churches in the City of London, our friend reminds us that in his day, churches were deeply respected. But they brought themselves into great disrepute by selling “indulgences,” which allowed those who were wealthy enough to be forgiven their sins.8 The indulgences, he reminds us, paid for a lot of beautiful religious architecture and a comfortable life for those members of the clergy willing to abuse the system.


pages: 460 words: 122,556

The End of Wall Street by Roger Lowenstein

Asian financial crisis, asset-backed security, bank run, banking crisis, Berlin Wall, Bernie Madoff, Black Swan, break the buck, 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, money market fund, moral hazard, mortgage debt, negative equity, Northern Rock, Ponzi scheme, profit motive, race to the bottom, risk tolerance, Ronald Reagan, Rubik’s Cube, savings glut, short selling, sovereign wealth fund, statistical model, the payments system, too big to fail, tulip mania, Y2K

It was also a measure of his political acuity; after Fannie and Freddie, the public had had enough of bailouts, which it regarded as handouts to wealthy bankers.ak ON TUESDAY, the stock market, worried by Lehman, reversed course and tumbled 2 percent. Credit markets fared even worse. Eschewing risk, lenders were pulling funds from private borrowers and parking them with the government for safety. After a day’s reflection, traders were unsettled by the loss of Fannie’s and Freddie’s preferred stock, and by the larger truth that removing the twins from danger had not resolved the banking crisis. In a telltale reminder that the country’s subprime problems were far from over, WaMu’s board sacked its CEO, Kerry Killinger, the banker who once had presumed that mortgages were just like retail. These assorted blows, striking on a single day as if from the fury of an angry god, weighed deeply on other troubled institutions, especially AIG. Its stock dropped under 20, and it was being forced to refinance billions of its debt under difficult conditions.

For them, the dream of home ownership had turned into a nightmare. Fully 20 percent of subprime borrowers were seriously delinquent—an extraordinary credit market bust. Even 5 percent of conventional mortgagors were delinquent, evidence that the disease of overleverage had penetrated the middle class.12 Despite these doleful augurs, the administration was still having trouble persuading the public that it had a stake in the banking crisis. The crisis was still widely seen as a Wall Street problem, and mail on the TARP was running solidly against. Senator Jon Kyl, Republican of Arizona, quipped that his mail was split: 50 percent “No” and 50 percent “Hell, no.”13 Trying to rally votes, President Bush gave a prime-time address on the economy—his first in eight years. He warned that without the legislation the United States could face “a long and painful recession.”

Those downgraded and defaulted bonds were on the books of banks, and others, and there was no painless way to unload them.11 In a perceptive essay published in Time, the British historian Niall Ferguson calculated that bank losses during the crisis amounted to $100 billion more than the total of new capital raised, implying (since each dollar of capital supported $10 or more on the balance sheet) that banks would have to reduce their assets by at least a trillion dollars.12 This guaranteed further price plunges, further bank losses. The devastation of banks implied an ever-stronger case for using the TARP for a capital injection. A group of professors with whom Bernanke periodically consulted were at the Fed that Friday, and strongly recommended capital investment, noting that it had worked in Sweden during its banking crisis in the 1990s. Bernanke surely mentioned this to Paulson, as the secretary told his staff he wanted them to work on a “capital program.”13 Then, Paulson took his family to an island off the coast of Georgia for a weekend of fishing and a respite from stress. The Monday he returned, stock markets around the world crashed. 18 RELUCTANT SOCIALIST The holders of the cash reserve [the central bank] must be ready not only to keep it for their own liabilities, but to advance it most freely for the liabilities of others.


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Keynes Hayek: The Clash That Defined Modern Economics by Nicholas Wapshott

"Robert Solow", airport security, banking crisis, Bretton Woods, British Empire, business cycle, collective bargaining, complexity theory, creative destruction, cuban missile crisis, Francis Fukuyama: the end of history, full employment, Gordon Gekko, greed is good, Gunnar Myrdal, if you build it, they will come, Isaac Newton, Joseph Schumpeter, Kickstarter, liquidationism / Banker’s doctrine / the Treasury view, means of production, Mont Pelerin Society, mortgage debt, New Journalism, Northern Rock, Paul Samuelson, Philip Mirowski, price mechanism, pushing on a string, road to serfdom, Robert Bork, Ronald Reagan, Simon Kuznets, The Chicago School, The Great Moderation, The Wealth of Nations by Adam Smith, Thomas Malthus, trickle-down economics, War on Poverty, Yom Kippur War

Meyer immediately suggested to Hoover that the reparations be cut in half; three days later Hoover went a step further, declaring a moratorium on all debt payments for a year. Keynes declared the decision “a first step of the greatest possible value.”10 Keynes reported back to his friend O. T. Falk11 in London a parlous state of affairs in America that uncannily presaged the symptoms of the banking crisis that would overtake America half a century later, in September 2008. “[The banks] have purchased great quantities of second-grade bonds which have depreciated in value and their advances to farmers and against real estate are inadequately secured,”12 Falk recorded. In a lecture to the New School in New York Keynes rejected the free-market prescriptions “of the so-called ‘economists’ attached to leading New York banks,”13 and advocated a rise in prices and a loosening of credit to put the economy back on track.

Keynes was surprised to discover that in a city that was home to American entrepreneurs and a focal point of American business, the Chicago economists, led by Quincy Wright,16 seemed as keen on increasing public expenditure as he was.17 Keynes arrived home to a Britain suffering a profound crisis in confidence in the government’s ability to pay its debts, combined with a run on sterling, which was still pegged to the gold standard. The German elections of 1930, which left Adolf Hitler’s extreme Nazi Party victorious, prompted visions of a civil war in Germany, leading to a flight of capital from the country and heavy withdrawals of gold and foreign exchange. In early 1931, the German Reichsbank was unable to honor its commitments, setting off a banking crisis that led in turn to an intense round of speculation against the pound sterling, causing the British Treasury to seek an American loan. To meet the terms of the loan, Snowden, the Labour chancellor, proposed a package of severe public-expenditure cuts drawn up by a former official of Prudential Assurance, Sir George May. These included a 20 percent reduction in unemployment pay. Keynes condemned May’s measures as self-defeating and estimated that another 250,000 to 400,000 would be thrown out of work as a result, costing the exchequer far more than it hoped to save from cutting unemployment relief.

It was Sraffa’s reputation as an economist with an original cast of mind that led Keynes to commission him to write an article for the “Reconstruction in Europe” series, a piece that was sharply critical of the three largest Italian banks. The piece was so damning of Italian banking practices that it drew the attention of Mussolini himself, who was, coincidentally, in the midst of trying to solve a banking crisis by using state funds to rescue the ailing Banco di Roma. Sraffa’s piece was perfectly timed to cause the maximum mischief, and Keynes was delighted. Mussolini, however, was not. He decried Sraffa’s article as a “slander against Italy,”14 the unpatriotic act of a radical agent paid by foreigners. In threatening telegrams to Sraffa’s father Angelo, Mussolini demanded that a retraction and apology be published.


Adam Smith: Father of Economics by Jesse Norman

"Robert Solow", active measures, Andrei Shleifer, balance sheet recession, bank run, banking crisis, Basel III, Berlin Wall, Black Swan, Branko Milanovic, Bretton Woods, British Empire, Broken windows theory, business cycle, business process, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, centre right, cognitive dissonance, collateralized debt obligation, colonial exploitation, Corn Laws, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, David Brooks, David Ricardo: comparative advantage, deindustrialization, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, Fellow of the Royal Society, financial intermediation, frictionless, frictionless market, future of work, George Akerlof, Hyman Minsky, income inequality, incomplete markets, information asymmetry, intangible asset, invention of the telescope, invisible hand, Isaac Newton, Jean Tirole, John Nash: game theory, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, lateral thinking, loss aversion, market bubble, market fundamentalism, Martin Wolf, means of production, money market fund, Mont Pelerin Society, moral hazard, moral panic, Naomi Klein, negative equity, Network effects, new economy, non-tariff barriers, Northern Rock, Pareto efficiency, Paul Samuelson, Peter Thiel, Philip Mirowski, price mechanism, principal–agent problem, profit maximization, purchasing power parity, random walk, rent-seeking, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, scientific worldview, seigniorage, Socratic dialogue, South Sea Bubble, special economic zone, speech recognition, Steven Pinker, The Chicago School, The Myth of the Rational Market, The Nature of the Firm, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Malthus, Thorstein Veblen, time value of money, transaction costs, transfer pricing, Veblen good, Vilfredo Pareto, Washington Consensus, working poor, zero-sum game

See standing army Arrow, Kenneth, 193–195, 205–206, 213, 222, 244 Arrow securities, 244 Asia, 274–275, 330 Asquith, Herbert, 23 asset markets, 247–249, 252 assets, of moral identity, 303 asymmetries, of power, 282–283, 285 Austria, 69 Ayr Bank crisis, 89, 91–93, 99–100, 174, 253 Bacon, Francis, 163 The Masculine Birth of Time by, 214 natural philosophy of, 164–165 The New Atlantis by, 164 on science, 166 Bagehot, Walter, 277 Balliol, 23–26 Bank of England, 92 banking system international, 259–260 loans in, 249–250 regulation of, 254 in Scotland, 88–89, 91–92 banks capital and, 108 financial products of, 250 lobbying by, 261 regulation of, 254, 259 rent-extraction by, 260–261 See also Ayr Bank crisis Becker, Gary, 215 behaviour, 169–170, 196, 209, 222 human, 29, 197 in markets, 236–237 The Theory of Moral Sentiments on, 201 The Wealth of Nations on, 221 benevolence, 56–57 bent markets, 283–284 Bentham, Jeremy, 21, 198, 201 Berkeley, Bishop, 25 big data, 281–282 bills of exchange, 92–93 birth, of Smith, A., 4 Black, Joseph, 126–127, 136–137, 152, 169 Blackstone, William, 100 Blair, Hugh, 124 Boston Tea Party, 103 Boswell, James, 6, 51–52, 127–128, 132, 154–155 Bradstreet, Dudley, 35 Bretton Woods Agreement, 252 Breyer, Stephen, 258 Britain.

The lack of capital had been a spur to innovation, notably with the invention of the ‘cash account’, the world’s first overdraft, by the Royal Bank of Scotland. But it meant that the easy-lending Ayr Bank had quickly been swamped by demand, including from speculators, and it over-expanded. There was a sharp recession in Scotland in 1771, causing many of its loans to turn sour; and lacking access to liquidity and capital, the whole structure came crashing down in the classic pattern of banking failures ever since. This then resulted in a secondary banking crisis which only four private banks in Edinburgh survived, and which inflicted enormous losses on the Ayr Bank’s original partners, who, unlike the investors in today’s incorporated limited-liability banks, were exposed to the full extent of their wealth. Their creditors were ultimately paid in full, but at the horrendous total cost to the partners of £663,397. It was said that as much as £750,000 in landed property was sold to fund the losses.

As the economy grew, so it further benefited from a happy combination of natural and human factors—copious coal reserves, the proximity of major ports, a land frontier with England, expanding export trade, a vibrant (sometimes too vibrant) banking system, low labour costs and a dynamic spirit of entrepreneurship among them. Such growth required capital, and Scotland’s shortage of capital meant that the country was ill equipped to ride out periodic recessions resulting from over-expansion, shifts in demand or bad harvests, all of which played a role in the Ayr Bank crisis of 1772. It seems very likely that Smith worked to assist his patron Buccleuch in dealing with the consequences of that crisis; but even if he did not he had a ringside seat in Dalkeith from which to watch the ramp-up in the bank’s loans, its rapid collapse and the aftermath. Part of Smith’s genius is to take his personal experience and to draw out both telling anecdotes and general lessons from it in his writings.


pages: 346 words: 90,371

Rethinking the Economics of Land and Housing by Josh Ryan-Collins, Toby Lloyd, Laurie Macfarlane

"Robert Solow", agricultural Revolution, asset-backed security, balance sheet recession, bank run, banking crisis, barriers to entry, basic income, Bretton Woods, business cycle, Capital in the Twenty-First Century by Thomas Piketty, collective bargaining, Corn Laws, correlation does not imply causation, creative destruction, credit crunch, debt deflation, deindustrialization, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, garden city movement, George Akerlof, ghettoisation, Gini coefficient, Hernando de Soto, housing crisis, Hyman Minsky, income inequality, information asymmetry, knowledge worker, labour market flexibility, labour mobility, land reform, land tenure, land value tax, Landlord’s Game, low skilled workers, market bubble, market clearing, Martin Wolf, means of production, money market fund, mortgage debt, negative equity, Network effects, new economy, New Urbanism, Northern Rock, offshore financial centre, Pareto efficiency, place-making, price stability, profit maximization, quantitative easing, rent control, rent-seeking, Richard Florida, Right to Buy, rising living standards, risk tolerance, Second Machine Age, secular stagnation, shareholder value, the built environment, The Great Moderation, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, transaction costs, universal basic income, urban planning, urban sprawl, working poor, working-age population

A Joint Advisory Committee (JAC) made up of industry and government representatives decided how much mortgage lending should be allowed across the whole country. During the 1960s and 1970s, so-called ‘secondary banks’, including US banks, began to enter the London banking sector and lend heavily to commercial property companies, encouraged by rapidly rising land prices in the capital. Excessive commercial property lending was the most significant contributor to the ‘secondary banking’ crisis of 1973–74 (Reid, 1982). In response to competition from these secondary banks and other financial institutions outside the Bank of England’s regulatory remit, the 1971 Competition, Credit and Control (CCC) Act was designed to level the playing field, bringing a wide range of new financial institutions under the Bank’s remit (although not building societies) but also allowing the large UK clearing banks to borrow from the fast growing wholesale markets sector (see Box 5.3).8 Box 5.3 How banks and building societies ‘fund’ mortgages Banks must ensure that their assets (the loans they make) match the sum of their liabilities (money they owe to customers) and their equity (money owed to the bank’s owners).

House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again. Chicago: University of Chicago Press. Mian, Atif, Amir Sufi, and Emil Verner. 2015. ‘Household Debt and Business Cycles Worldwide’. National Bureau of Economic Research. Mill, John Stuart. 1884. Principles of Political Economy. D. Appleton. Milne, Alistair, and Justine A. Wood. 2014. ‘An Old Fashioned Banking Crisis: Credit Growth and Loan Losses in the UK 1997–2012’. In The Causes and Consequences of the Long UK Expansion, ed. J. S. Chadha, A. Chrystal, J. Pearlman, P. Smith, and S. Wright. Cambridge: Cambridge University Press. Minsky, Hyman. 1986. Stabilizing and Unstable Economy. New Haven, CT: Yale University Press. Minsky, Hyman P. 1992. ‘The Financial Instability Hypothesis’. The Jerome Levy Economics Institute Working Paper no. 74, May.

Leicester: Leicester University Press. Reed, Howard. 2016. ‘A Citizen’s Income: A Recipe for Change’. Compass Thinkpiece no. 4. http://www.compassonline.org.uk/publications/a-citizens-income-a-recipe-for-change. Reed, Howard, and Jacob Mohun Himmelweit. 2012. Where Have All the Wages Gone? Lost Pay and Profits Outside Financial Services, Touchstone Extras. London: Trades Union Congress. Reid, Margaret. 1982. Secondary Banking Crisis in the UK. Macmillan. Ricardo, David. 1817. Principles of Political Economy and Taxation. Batoche Books. Ricardo, David. 1973. The Works and Correspondence of David Ricardo: Volume 11, General Index, ed. Piero Sraffa. Vol. 11. Cambridge: Cambridge University Press. Riley, Don. 2001. Taken for a Ride: Trains, Taxpayers and the Treasury. Teddington: Centre for Land Policy Studies. Robert-Hughes, R., W.


pages: 327 words: 90,542

The Age of Stagnation: Why Perpetual Growth Is Unattainable and the Global Economy Is in Peril by Satyajit Das

"Robert Solow", 9 dash line, accounting loophole / creative accounting, additive manufacturing, Airbnb, Albert Einstein, Alfred Russel Wallace, Anton Chekhov, Asian financial crisis, banking crisis, Berlin Wall, bitcoin, Bretton Woods, BRICs, British Empire, business cycle, business process, business process outsourcing, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Clayton Christensen, cloud computing, collaborative economy, colonial exploitation, computer age, creative destruction, cryptocurrency, currency manipulation / currency intervention, David Ricardo: comparative advantage, declining real wages, Deng Xiaoping, deskilling, disintermediation, disruptive innovation, Downton Abbey, Emanuel Derman, energy security, energy transition, eurozone crisis, financial innovation, financial repression, forward guidance, Francis Fukuyama: the end of history, full employment, gig economy, Gini coefficient, global reserve currency, global supply chain, Goldman Sachs: Vampire Squid, happiness index / gross national happiness, Honoré de Balzac, hydraulic fracturing, Hyman Minsky, illegal immigration, income inequality, income per capita, indoor plumbing, informal economy, Innovator's Dilemma, intangible asset, Intergovernmental Panel on Climate Change (IPCC), Jane Jacobs, John Maynard Keynes: technological unemployment, Kenneth Rogoff, knowledge economy, knowledge worker, light touch regulation, liquidity trap, Long Term Capital Management, low skilled workers, Lyft, Mahatma Gandhi, margin call, market design, Marshall McLuhan, Martin Wolf, Mikhail Gorbachev, mortgage debt, mortgage tax deduction, new economy, New Urbanism, offshore financial centre, oil shale / tar sands, oil shock, old age dependency ratio, open economy, passive income, peak oil, peer-to-peer lending, pension reform, plutocrats, Plutocrats, Ponzi scheme, Potemkin village, precariat, price stability, profit maximization, pushing on a string, quantitative easing, race to the bottom, Ralph Nader, Rana Plaza, rent control, rent-seeking, reserve currency, ride hailing / ride sharing, rising living standards, risk/return, Robert Gordon, Ronald Reagan, Satyajit Das, savings glut, secular stagnation, seigniorage, sharing economy, Silicon Valley, Simon Kuznets, Slavoj Žižek, South China Sea, sovereign wealth fund, TaskRabbit, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, the market place, the payments system, The Spirit Level, Thorstein Veblen, Tim Cook: Apple, too big to fail, total factor productivity, trade route, transaction costs, uber lyft, unpaid internship, Unsafe at Any Speed, Upton Sinclair, Washington Consensus, We are the 99%, WikiLeaks, Y2K, Yom Kippur War, zero-coupon bond, zero-sum game

In poorer countries, where spending on these items, including everyday essentials like cooking oil, accounts for a high proportion of income, this causes hardship. Higher commodity prices in combination with large flows of capital create inflationary pressures, forcing emerging countries to increase interest rates, thus slowing economic growth. These developments threaten to reverse progress in reducing poverty. Regulations are increasingly a weapon in the battle between nations. After the 2008 banking crisis, new rules for financial institutions were developed to ensure more rigorous regulatory oversight. They were intended to be adopted globally, to ensure international consistency. Emerging countries argue that stringent regulations intended for complex multinational financial institutions in developed countries are inappropriate for their simpler financial systems, and that adoption of them would impede the ability of local banks to provide the credit necessary to support the local economy.

Finding a way to increase consumption is difficult. Large increases in wages would reduce export competitiveness. Large-scale social programs would strain public finances, necessitating higher tax rates. Greater consumption would reduce the high saving levels, which provide state-owned banks with deposits that can be used, as required, by the central government to drive economic growth and avoid a banking crisis. The low interest rate paid on deposits, set well below inflation, allows banks to earn substantial profits from the large margin between the rate at which they borrow and lend. The resulting high profits are then available to absorb losses on poor quality loans that cannot be serviced or paid back. The low returns on savings equate to a transfer of wealth to banks and borrowers from households, amounting to as much as 5 percent of GDP each year.

It has nothing to do with a rescue.”29 With Greece, Portugal, Ireland, Spain, and Cyprus all needing assistance, panic replaced denial. There was no willingness to deal with high debt levels that were incapable of being repaid, the lack of competitiveness of some Eurozone members, or the inflexible single currency and uniform interest rates across disparate economies. Creditors like Germany were unwilling to write off debt which would trigger a banking crisis. No one was willing to countenance a restructuring of the Eurozone or the euro, which had been designed without an exit mechanism. Lorenzo Bini Smaghi, an Italian European Central Bank executive board member, confessed that the euro project assumed there would be no crises. Slow, tortuous processes yielded inadequate policy responses. The Stability and Growth Pact evoked a policy of austerity (reduction in budget deficits to 3 percent of GDP) and enforced debt reduction (to 60 percent of GDP).


pages: 920 words: 233,102

Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State by Paul Tucker

Andrei Shleifer, bank run, banking crisis, barriers to entry, Basel III, battle of ideas, Ben Bernanke: helicopter money, Berlin Wall, Bretton Woods, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, conceptual framework, corporate governance, diversified portfolio, Fall of the Berlin Wall, financial innovation, financial intermediation, financial repression, first-past-the-post, floating exchange rates, forensic accounting, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, George Akerlof, incomplete markets, inflation targeting, information asymmetry, invisible hand, iterative process, Jean Tirole, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, liberal capitalism, light touch regulation, Long Term Capital Management, means of production, money market fund, Mont Pelerin Society, moral hazard, Northern Rock, Pareto efficiency, Paul Samuelson, price mechanism, price stability, principal–agent problem, profit maximization, quantitative easing, regulatory arbitrage, reserve currency, risk tolerance, risk-adjusted returns, road to serfdom, Robert Bork, Ronald Coase, seigniorage, short selling, Social Responsibility of Business Is to Increase Its Profits, stochastic process, The Chicago School, The Great Moderation, The Market for Lemons, the payments system, too big to fail, transaction costs, Vilfredo Pareto, Washington Consensus, yield curve, zero-coupon bond, zero-sum game

Sitting next to him at dinner, I once asked former Bundesbank president Helmut Schlesinger why he publically maintained that central banks should not be the bank supervisor when, as a matter of fact, many Buba staff were engaged in bank supervision. The response was that the central bank was not formally responsible or accountable, so banking problems would not infect the Bundesbank’s reputation and standing as a monetary authority.20 In my own country, and I would guess the United States, the central bank could not escape censure over a banking crisis by saying that it was only one of a number of de facto supervisors, not the de jure regulator. (As reported above, the Bank of England could not escape responsibility for a banking crisis even when it had no role in supervising banks and markets.) To be clear, the position of this book is that if central banks are to be involved materially in supervision, whether alongside other agencies or not, our democratic values demand that their role should be formalized for all the reasons explored in part II.

They did not regain preeminence until the 1990s, when the International Monetary Fund and World Bank began prescribing independent central banks and the framework for price stability known as inflation targeting to the emerging-market economies rising around the world. But, as though revisiting their past, the Great Moderation they presided over turned nasty, twisting itself into the Great Financial Crisis and years—not yet behind us—of below-par growth. From Impotence to the Only Game in Town For the central bankers themselves, however, history has not repeated itself. Indeed, the contrast with the aftermath of the banking crisis, monetary disorder, and economic slump of the 1920s and 1930s could hardly be greater. Then, governments quickly turned away from globalization and central bank–centered macroeconomic policies. Nationalism was the order of the day—autarky, propped up by barriers to trade, controls on capital flows, and financial repression.7 When at the end of World War II the international economic order was reconstructed at Bretton Woods, New Hampshire, central banks were largely bystanders.

While largely about private sector organizations, some of its points carry across to the state. 17 Norman was described as mesmeric by Sir Jasper Hollam, who started his career as a clerk in Norman’s time and retired in the late 1970s as deputy governor (source: transcripts of interviews for Forrest Capie’s history of the Bank of England). Hollam, who was central to the Bank’s efforts to contain the UK’s Secondary Banking Crisis in the mid-1970s, passed away while I was beginning this project. 18 Bicchieri, Norms. 19 Beetham, Legitimation of Power, p. 11. 20 In the second edition (pp. 266–268), Beetham argues for avoiding the term consent for the third condition, preferring something like the formula I have used in the main text, on the grounds that “consent” would cover the second criterion’s test of beliefs-cum-values whereas, for a society as a whole, beliefs can be inferred but not directly observed.


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Rethinking Capitalism: Economics and Policy for Sustainable and Inclusive Growth by Michael Jacobs, Mariana Mazzucato

balance sheet recession, banking crisis, basic income, Bernie Sanders, Bretton Woods, business climate, business cycle, Carmen Reinhart, central bank independence, collaborative economy, complexity theory, conceptual framework, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, decarbonisation, deindustrialization, dematerialisation, Detroit bankruptcy, double entry bookkeeping, Elon Musk, endogenous growth, energy security, eurozone crisis, factory automation, facts on the ground, fiat currency, Financial Instability Hypothesis, financial intermediation, forward guidance, full employment, G4S, Gini coefficient, Growth in a Time of Debt, Hyman Minsky, income inequality, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), Internet of things, investor state dispute settlement, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, knowledge economy, labour market flexibility, low skilled workers, Martin Wolf, mass incarceration, Mont Pelerin Society, neoliberal agenda, Network effects, new economy, non-tariff barriers, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, quantitative easing, QWERTY keyboard, railway mania, rent-seeking, road to serfdom, savings glut, Second Machine Age, secular stagnation, shareholder value, sharing economy, Silicon Valley, Steve Jobs, the built environment, The Great Moderation, The Spirit Level, Thorstein Veblen, too big to fail, total factor productivity, transaction costs, trickle-down economics, universal basic income, very high income

Investment-led Growth: A Solution to the European Crisis Table 1: Private investment as % of GDP Table 2: Projected average GDP growth (%) Table 3: Unemployed workers (millions of people) Table 4: Debt-to-GDP ratio, south euro zone Table 5: Net government lending as % of GDP List of Illustrations 1. Rethinking Capitalism: An Introduction Figure 1: Percentage of countries experiencing a banking crisis (1945–2008) (weighted by their share of world income) Figure 2: Outstanding private debt (% of GDP) Figure 3: Comparing profiles of UK recessions and recoveries Figure 4: Unemployment rates, selected countries, 2007, 2010 and 2014 Figure 5: Average real wage index for selected developed countries, 2007–2013 Figure 6: Investment (gross non-residential fixed capital formation) as a percentage of GDP Figure 7: Trends in growth in average wages and labour productivity in thirty-six developed economies, 1999–2013 Figure 8: Growth in real after-tax income from 1979 to 2007, US Figure 9: Global greenhouse gas emissions 1990–2050 2.

Rather, it reflected an unprecedented increase in household and corporate debt (see Figure 2). Low interest rates and lax lending practices, particularly for land and property, had fuelled an asset price bubble which would inevitably burst. In this sense the pre-crisis growth of output can be judged only alongside its post-crisis collapse. Figure 1: Percentage of countries experiencing a banking crisis (1945–2008) (weighted by their share of world income) Note: Sample size includes all countries that were independent states in the given year. Source: C. M. Reinhart and K. S. Rogoff, This Time is Different: Eight Centuries of Financial Folly, Princeton, NJ, Princeton University Press, 2009. Figure 2: Outstanding private debt (% of GDP) Source: OECD.stat (http://stats.oecd.org/index.aspx?

Experiences from Transition and Emerging Countries, Brussels, Bruylant, 2014, pp. 33–49. 43 The title of Lou Gerstner’s account of turning the huge IBM bureaucracy into a gigantic, agile organisation can be a mirror for what can be done in governments. See L. Gerstner, Who Says Elephants Can’t Dance? New York, Harper Business, 2002. 44 See Rodrik, Industrial Policy. Index A Acts of Parliament Transparency of Lobbying, Non-Party Campaigning and Trade Union Administration Act 2014 AIG Apple ARPA-E austerity policies Australia top earners B balanced budgets Bank of England banks bailouts banking crisis central emergency loans to investment loans by regulation rents reserves ‘shadow’ state investment banks Barro, Robert BBC Bear Stearns Bernanke, Ben biotechnology venture capitalists BNDES Bretton Woods agreements Brown, Gordon Buffett, Warren Bush, George, Jr C Canada average real wage index top earners unemployment capital, patient Capita Carney, Mark Cave, Tamsin Cheung, Steven N.


pages: 172 words: 54,066

The End of Loser Liberalism: Making Markets Progressive by Dean Baker

Asian financial crisis, banking crisis, Bernie Sanders, business cycle, collateralized debt obligation, collective bargaining, corporate governance, currency manipulation / currency intervention, Doha Development Round, financial innovation, full employment, Home mortgage interest deduction, income inequality, inflation targeting, invisible hand, manufacturing employment, market clearing, market fundamentalism, medical residency, patent troll, pets.com, pirate software, price stability, quantitative easing, regulatory arbitrage, rent-seeking, Robert Shiller, Robert Shiller, Silicon Valley, too big to fail, transaction costs

According to the story, the lending approved by Congress in the Troubled Asset Relief Program (TARP) along with special lending facilities created by the Federal Reserve Board prevented a financial collapse that would have precipitated another Great Depression. While these measures deserve credit for preventing a financial collapse, there is no reason to believe that a financial collapse would have led to a second Great Depression, defined as a decade of double-digit unemployment. The first Great Depression was not just the result of mismanagement of a banking crisis in its early days. The failure of the Fed and the Treasury to take steps to backstop the banking system undoubtedly led to a more severe downturn for the economy and to financial disasters for millions of families who lost their life’s savings in failed banks. However, nothing about this initial failure to act decisively doomed the economy to a decade of double-digit unemployment. Rather, the extended depression was the result of persistent policy failures over the course of a decade.

By January 1980, Volcker had raised interest rates enough to push the economy into recession.[42] After a brief reprieve in the second half of 1980, he began to push up interest rates again. The economy returned to recession in July 1981, with unemployment peaking at just under 11 percent. Volcker was clearly serious about fighting inflation, and he retains a legacy as “a giant of the financial industry” who “restored credibility to the Federal Reserve.”[43] In a similar vein, Ben Bernanke was chairman of the Fed when the housing bubble collapsed and the banking crisis threatened to bring down the financial system. Even though the resulting fallout has given the country the worst downturn since the Great Depression, almost no one in a position of authority has suggested that Bernanke be fired for this policy failure. While it is true that Bernanke only took over as Fed chair in January 2006, after the housing bubble had already expanded to a level where it would have been almost impossible to deflate without causing serious damage, Bernanke had been in top policy positions since the summer of 2002.


pages: 376 words: 109,092

Paper Promises by Philip Coggan

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, balance sheet recession, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Madoff, Black Swan, Bretton Woods, British Empire, business cycle, 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, John Meriwether, joint-stock company, Kenneth Rogoff, Kickstarter, labour market flexibility, light touch regulation, Long Term Capital Management, manufacturing employment, market bubble, market clearing, Martin Wolf, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, negative equity, 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 inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, 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, zero-sum game

Just as a bank is vulnerable to a run by depositors, an economy is vulnerable to a loss of confidence in debtors’ ability to repay. The bigger the debt pile, the more earth-shaking these crises of confidence will be. In essence, that is why the debt crisis of 2007 – 08 was so alarming. Pumped up by debt, the banks had become so large relative to the rest of the economy that they simply had to be rescued, at a huge cost. The resulting recession delivered such a blow to government finances that the bank crisis was followed by a sovereign-debt crisis. The finances of banks are highly counter-intuitive. Customer deposits are a liability, not an asset, since they may have to be repaid at any time; the assets of a bank consist largely of the loans made to companies and individuals since they too will eventually be repaid. But those debtors may not (and probably will not) have the cash available to repay the loan immediately, so any run on the bank will create a potential problem for its debtors.

These austerity measures were passed by the Greek parliament in late June in the teeth of strikes and violent protests. For the Greeks, these ‘rescue packages’ simply mean further debt that still has to be paid back, and an abrupt decline in their standard of living. Other EU nations were desperate to avoid a formal Greek default. First, much Greek debt was in the hands of the wider international banking system; a default might thus precipitate a further banking crisis. Secondly, the EU feared that the failure of Greece would simply prompt the markets to switch their attentions to Portugal, Ireland, or (far worse) the much-larger Spain and Italy. Once the principle of default was applied in one nation, why not the others? By delaying any Greek default, the EU hoped to give the banks (and governments in other countries) the chance to repair their finances.

The economy has grown, but asset prices have risen faster, and debts have risen faster still. Debtors, from speculative homebuyers to leading governments, have made promises to pay that they are unlikely to meet in full. Creditors who are counting on those debts to be repaid will be disappointed. Clearing up the mess will be a long, slow process. It will involve many false starts, as occurred during the banking crisis of 2008 and as we have already seen in the European sovereign debt crisis. The debts may be repaid in inflated money, or devalued currency; they may be passed on to other governments with a greater capacity to repay; or they may result in outright default. Breaking those paper promises will result in economic turmoil, as both debtors and creditors suffer. This is a crisis as severe as those that resulted in the end of the gold standard in the 1930s or the end of fixed exchange rates in the 1970s.


The Permanent Portfolio by Craig Rowland, J. M. Lawson

Andrei Shleifer, asset allocation, automated trading system, backtesting, bank run, banking crisis, Bernie Madoff, buy and hold, capital controls, correlation does not imply causation, Credit Default Swap, diversification, diversified portfolio, en.wikipedia.org, fixed income, Flash crash, high net worth, High speed trading, index fund, inflation targeting, margin call, market bubble, money market fund, new economy, passive investing, Ponzi scheme, prediction markets, risk tolerance, stocks for the long run, survivorship bias, technology bubble, transaction costs, Vanguard fund

Even if you miss a hot new opportunity because you don't fully understand it, there will be duds that you will also avoid by staying away. The most successful investors on the planet have no shame in admitting they avoided an investment that they didn't understand. So don't let anyone make you feel guilty for staying away from something that doesn't make sense to you. Rule #10: Don't Depend on Any One Investment, Institution, or Person for Your Safety In the 2008 banking crisis, some institutions that existed for over a century went bankrupt almost overnight inflicting large losses on investors. In the same year Bernie Madoff, one of the founders of the NASDAQ stock exchange, was revealed to have been running a multibillion-dollar Ponzi scheme that caused tremendous losses to investors, many of whom had entrusted him with their life savings. The process above repeated itself in 2011 when another large firm, MF Global, went bankrupt and many investors found that their accounts had apparently been plundered by corrupt management.

The government has attempted to ease the fear of this sort of event through the Federal Deposit Insurance Corporation (FDIC), which was created in the 1930s and insures all deposits up to a certain amount. Although FDIC deposit insurance has worked to date, the reality is that the FDIC actually has very few assets in relation to its liabilities. That means a wide-scale bank failure could quickly wipe out all of the FDIC's reserves. During the 2008 to 2009 banking crisis, the FDIC did actually run low on reserves and had to go to Congress and the Treasury to obtain a line of credit to deal with the failures—to the tune of around $500 billion. So this threat is not theoretical.11 The FDIC stated in a February 2009 disclosure12: Even though the FDIC has significant authority to borrow from the Treasury to cover losses, a fund balance and reserve ratio that are near zero or negative could create public confusion about the FDIC's ability to move quickly to resolve problem institutions and protect insured depositors.

Protect yourself first and let banks that make bad decisions deal with the consequences of losing customers. Cash Risk Matrix Table 8.11 is similar to the one shown in Chapter 7. This is because the same risks that affect other types of bonds also affect different types of cash (which are just a shorter maturity version of these investments). The only difference here is the addition of bank CDs, which although FDIC insured, do have a risk that during a very large bank crisis the FDIC could have problems paying back depositors. Note also that using a T-Bill fund does have counterparty risk if the managers do their job incorrectly. For most investors however, the ability to setup your own T-Bill ladder is not a convenient option so a fund is your best choice even with this small risk. Table 8.11 Cash Risk Matrix—T-Bills Score Best. Cash and Retirement Plans Many investors find that they have significant savings in a tax-deferred arrangement, such as an IRA or 401(k) plan.


pages: 357 words: 110,017

Money: The Unauthorized Biography by Felix Martin

bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, call centre, capital asset pricing model, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, creative destruction, credit crunch, David Graeber, en.wikipedia.org, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, fixed income, 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 Arrow, Kenneth Rogoff, mobile money, moral hazard, mortgage debt, new economy, Northern Rock, Occupy movement, plutocrats, Plutocrats, private military company, Republic of Letters, Richard Feynman, Robert Shiller, Robert Shiller, Scientific racism, scientific worldview, seigniorage, Silicon Valley, smart transportation, South Sea Bubble, supply-chain management, The Wealth of Nations by Adam Smith, too big to fail

Their ingenious evasions, the historian Tacitus reported, “though continually put down by new regulations, still, through strange artifices, reappeared.”10 Now the emperor decreed the game was up: the letter of the old dictator’s law would be enforced. The consequences were chaotic. As soon as the first ruling was made, it was realised with some embarrassment that most of the Senate was in breach of it. All the familiar features of a modern banking crisis followed. There was a mad scramble to call in loans in order to comply. Seeing the danger, the authorities attempted to soften the edict by relaxing its terms and announcing a generous transitional period. But the measure came too late. The property market collapsed as mortgaged land was fire-sold to fund repayments. Mass bankruptcy threatened to engulf the financial system. With Rome in the grip of a credit crunch, the emperor was forced to implement a massive bailout.

What was in short supply in a crisis was not gold, but trust and confidence—which the central bank had a unique ability to restore by standing ready to swap the discredited bills of private issuers for its own sovereign money. Such was the solution to which the Bank Directors always in the end groped their way reactively in any case. Grasp once that money is not a commodity but credit, and the rationale for making it explicit policy was clear. These diverging views of appropriate policy in a banking crisis were put in the shade, however, by a broader disagreement over the need for government policy, and especially monetary policy, to manage the macroeconomy more generally. The conventional view of money as a commodity medium of exchange was one of the pivotal assumptions behind perhaps the single most famous proposition associated with the classical school—an alleged economic law of nature as practically important as it was counter-intuitive, articulated by Jean-Baptiste Say in his Treatise on Political Economy in 1803.

Magnusson, L., ed. (1995), Mercantilism. London: Routledge. Mandeville, B. (1705), The Grumbling Hive, or, Knaves Turn’d Honest. London. —(1988) [1732], The Fable of the Bees, or, Private Vices, Publick Benefits, 2 Volumes. Indianapolis: Liberty Classics. Markowitz, H. (1952), “Portfolio selection.” Journal of Finance 7(1), 77–91. Martin, F. (2011), “Global High Yield: The Big Winner from the Banking Crisis.” Thames River Capital Monthly Newsletter. London: Thames River Capital. Marx, K. and Engels, F. (1985) [1848], The Communist Manifesto. London: Penguin. Mauss, M. (1954), The Gift: Forms and Functions of Exchange in Archaic Societies (tr. Cunnison, I.). London: Cohen & West. Mayhew, N. (1999), Sterling: The Rise and Fall of a Currency. London: Allen Lane. McCallum, B. (2012), “The Role of Money in New Keynesian Models.”


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

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, buy and hold, 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, intangible asset, interest rate derivative, interest rate swap, John Meriwether, 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, Right to Buy, shareholder value, short selling, The Wealth of Nations by Adam Smith, transaction costs, value at risk, yield curve, zero-coupon bond

Since the 18th century, it has also been a bank for other UK banks. As a result of the 1844 Act, the Bank of England gained the right to the sole issue of banknotes in England and Wales. It remained a privately owned bank until nationalisation in 1946. Until 1997, the Bank of England was both the supervisor of banks and adviser to the government on monetary policy, tasks conducted from different departments. The banking crisis of 1973–75 revealed weaknesses in the informal supervisory approach, which led to the Banking Act 1979, and subsequently the Banking Act 1987, under which the Bank would authorise and, in a flexible way, supervise the banking sector. The Bank of England’s continued role as supervisor came under increasing scrutiny, particularly after the July 1991 collapse of Bank of Credit and Commerce International (BCCI).

In 1995, the Bank of England decided not to intervene to save Barings from going bust, taking the view that the event would pose no systemic threat to the UK banking system, and that a wholly market-driven solution was more suitable to address the bank’s insolvency. In other cases, the Bank of England has intervened. In 1890, the Bank, along with various commercial banks, rescued Barings after its bad debts in Argentina were three times its capital and threatened its solvency. In 1975, the Bank arranged a banking consortium to act as a lifeboat in a banking crisis precipitated by large exposures to the property sector. In 1984, the Bank helped Johnson Matthey Bankers Limited, a London market maker in gold bullion, which had got into financial difficulties from its  16 HOW THE CITY REALLY WORKS __________________________________ commercial lending exposures. If the operation had been allowed to fail, other bullion dealers would have joined the creditors, which would have diminished confidence in the London gold market.

 84 HOW THE CITY REALLY WORKS __________________________________ Repos The repo (see also Chapter 2) means a sale and repurchase agreement and is effectively a short-term secured loan in the money markets, sometimes between banks and the Bank of England, and sometimes between financial institutions without involving the Bank directly. The popularity of the repo reflects the overwhelming shift in the money markets from unsecured towards secured lending, where bigger sums may be borrowed. The trend has been driven by the 1990s banking crisis in Japan, and recent banking problems in Germany, according to brokers. Let us look at how the classic repo works in the UK. Sometimes a bank borrows money from the Bank of England for a stated period, perhaps 7, 14 or 28 days, and provides collateral, usually in the form of government bonds. The banks are sitting on large portfolios of mainly government bonds, which they need to hold for reserves, and which have low yields but high collateral value.


pages: 408 words: 108,985

Rewriting the Rules of the European Economy: An Agenda for Growth and Shared Prosperity by Joseph E. Stiglitz

Airbnb, balance sheet recession, bank run, banking crisis, barriers to entry, Basel III, basic income, Berlin Wall, bilateral investment treaty, business cycle, business process, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, corporate raider, corporate social responsibility, creative destruction, credit crunch, deindustrialization, discovery of DNA, diversified portfolio, Donald Trump, eurozone crisis, Fall of the Berlin Wall, financial intermediation, Francis Fukuyama: the end of history, full employment, gender pay gap, George Akerlof, gig economy, Gini coefficient, hiring and firing, housing crisis, Hyman Minsky, income inequality, inflation targeting, informal economy, information asymmetry, intangible asset, investor state dispute settlement, invisible hand, Isaac Newton, labor-force participation, liberal capitalism, low skilled workers, market fundamentalism, mini-job, moral hazard, non-tariff barriers, offshore financial centre, open economy, patent troll, pension reform, price mechanism, price stability, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, rent-seeking, Robert Shiller, Robert Shiller, Ronald Reagan, selection bias, shareholder value, Silicon Valley, sovereign wealth fund, TaskRabbit, too big to fail, trade liberalization, transaction costs, transfer pricing, trickle-down economics, tulip mania, universal basic income, unorthodox policies, zero-sum game

Create an Improved European Stability Mechanism and a Banking Union There will be shocks in the future, and Europe needs to learn from the failures of the past to design a better way to respond to them. Under the extreme pressure of the sovereign debt crisis, the European Stability Mechanism (ESM) was created in 2012 as a €500 million fund to provide fiscal support to members of the Eurozone that are facing financial difficulties. It was a start: big enough to handle a crisis in a small country, but far short of what would be needed were there a banking crisis in a large one. Europe also realized that the lack of a common deposit insurance played a big role in exacerbating the euro crisis, as money fled the crisis countries. Creating a system of common deposit insurance is part of a broader agenda of creating a banking union in which all banks in the Eurozone would also have a common supervisor, and in which there would be a common procedure for bank resolution (for dealing with insolvent banks).

By 2013, a point in which most bailout costs had already been incurred, the European Union had plowed billions and billions into its banking sector, which served mainly to avert disaster; bailed-out banks did not generally improve performance in the coming years.3 All this aid came in addition to the hidden subsidies that were provided by the ECB, as it lent money to the banks at essentially zero or negative (real) interest rates. By mid-2017, banks in the Eurozone had about €760 billion in cheap liquidity thanks to the ECB.4 By way of comparison, in 2013 the EU sprinkled only €2 billion into a new effort to fight youth unemployment, a crucial problem exacerbated by the banking crisis and the austerity-minded response to the recession. But these financial costs are dwarfed by the costs that the financial crisis imposed on the rest of the economy. If one compares what GDP might have been without the crisis (based on historical growth) and what GDP actually was, Europe’s cumulative losses were in the trillions of euros. Of course, the individuals who lost their jobs and homes bore the brunt of the costs of the crisis.

By the early 2000s, acquisitions such as the purchase of British bank Abbey National by Spain’s Santander, or the decision by Italy’s UniCredit to buy Germany’s HypoVereinsbank, won praise as being future-oriented creators of European champions. Germany’s Deutsche Bank, once a relationship lender with a focus on Germany, came to be dominated by London-oriented investment bankers, a mistake the bank has only recently begun to remedy. Sensible calls for European oversight were lost in the din of praise for these behemoths. By 2010, as the worst of the banking crisis had passed, the top ten EU banks had about €15 trillion in assets, equivalent to 122 percent of GDP.6 And Europe remains home to ten globally systemically important banks (G-SIBs), the designation that the international Financial Stability Board set up in response to the crisis, which highlights banks whose failure would have a significant effect on the world’s economy. Because the failure of any of these huge banks imposes such large collateral damage on the rest of the economy, governments typically will not allow them to fail—hence the moniker “too big to fail.”


pages: 398 words: 105,917

Bean Counters: The Triumph of the Accountants and How They Broke Capitalism by Richard Brooks

accounting loophole / creative accounting, asset-backed security, banking crisis, Big bang: deregulation of the City of London, blockchain, BRICs, British Empire, business process, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Strachan, Deng Xiaoping, Donald Trump, double entry bookkeeping, Double Irish / Dutch Sandwich, energy security, Etonian, eurozone crisis, financial deregulation, forensic accounting, Frederick Winslow Taylor, G4S, intangible asset, Internet of things, James Watt: steam engine, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, light touch regulation, Long Term Capital Management, low cost airline, new economy, Northern Rock, offshore financial centre, oil shale / tar sands, On the Economy of Machinery and Manufactures, Ponzi scheme, post-oil, principal–agent problem, profit motive, race to the bottom, railway mania, regulatory arbitrage, risk/return, Ronald Reagan, savings glut, short selling, Silicon Valley, South Sea Bubble, statistical model, supply-chain management, The Chicago School, too big to fail, transaction costs, transfer pricing, Upton Sinclair, WikiLeaks

The Medici Bank tended to take deposits, and thus have to repay depositors, in florins, since this was the currency used by the Church hierarchy and wealthier merchants. It was owed money, however, in a mixture of relatively weakening currencies. The combination eroded its margins significantly. At the same time, after being milked of profits to fund Cosimo’s and later Lorenzo’s extravagance, its branches were highly leveraged. The effect of any losses on the Medici would be magnified, just as in the twenty-first-century banking crisis. But to the extent that it could still be considered one bank, it remained the largest in Europe and as a matter of pride rarely refused deposits. Nor would it reduce the generous discrezione interest rates it paid on them. Most of its branches were consequently on the lookout for ever higher returns from lending this money out. This in turn meant loans to the warring kings, princes and dukes of Europe.

In pursuing them, they would create the firms that still dominate accountancy today. Among them was William Barclay Peat, a landowner’s son from Fife, who headed to London as a 17-year-old in 1870 to join the office of an accountancy firm that itself had relocated from Aberdeen. Within seven years he was running the firm, renamed W. B. Peat & Co. Another Glaswegian, James Marwick, was sent in 1891 to Melbourne by investors worried about money at risk in an Australian banking crisis. He set off home via North America but didn’t make it back. Instead, spotting the potential in a United States booming on the back of rail, steel and oil, he set up a new firm in New York. There the six-foot-six Glaswegian – described by a biographer as ‘a big man in every way, his personality, his stature, and his role as a mover and shaker’11 – established his reputation by identifying the overvaluation of securities at a mortgage finance company.

More than six years after the crisis, and having been told by the chairman of an influential parliamentary committee that the latter omission was a ‘serious mistake’, the FRC did open a file on the case but closed it just over a year later with the conclusion that KPMG’s work, including on the critical question of whether there were material uncertainties over the bank’s going-concern status, ‘did not fall significantly short of the standards reasonably to be expected’.60 The credibility of this conclusion took a blow when leaked minutes of a December 2007 meeting among leading accountants revealed that the accountancy regulator at least had been ‘fully aware that there may be going-concern problems in relation to the forthcoming year-end and sectors such as banking’.61 With Northern Rock already at the banking knacker’s yard and HBOS looking likely to head there next, these doubts had almost certainly included the Scottish bank. But KPMG had taken the HBOS board’s word that funding would continue to be forthcoming. That, decided the regulator, got the firm over the depressingly low bar required to escape any censure. Regulatory indifference had already been apparent some years earlier. When the House of Lords committee looking at the banking crisis had questioned FRC chief executive, former civil servant Stephen Haddrill, one peer had asked: ‘As a matter of interest, who were the auditors of Northern Rock?’ That was in November 2010, just three years after the Rock had been bailed out with £20bn of public money. It might have been hoped that the accountancy regulator would have been deep into an examination of the part that accountancy had played in the crisis, including this key episode.


pages: 354 words: 105,322

The Road to Ruin: The Global Elites' Secret Plan for the Next Financial Crisis by James Rickards

"Robert Solow", Affordable Care Act / Obamacare, Albert Einstein, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, Bayesian statistics, Ben Bernanke: helicopter money, Benoit Mandelbrot, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Black Swan, blockchain, Bonfire of the Vanities, Bretton Woods, British Empire, business cycle, butterfly effect, buy and hold, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, cellular automata, cognitive bias, cognitive dissonance, complexity theory, Corn Laws, corporate governance, creative destruction, Credit Default Swap, cuban missile crisis, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, debt deflation, Deng Xiaoping, disintermediation, distributed ledger, diversification, diversified portfolio, Edward Lorenz: Chaos theory, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, fiat currency, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, Fractional reserve banking, G4S, George Akerlof, global reserve currency, high net worth, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Isaac Newton, jitney, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Rogoff, labor-force participation, large denomination, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, mutually assured destruction, Myron Scholes, Naomi Klein, nuclear winter, obamacare, offshore financial centre, Paul Samuelson, Peace of Westphalia, Pierre-Simon Laplace, plutocrats, Plutocrats, prediction markets, price anchoring, price stability, quantitative easing, RAND corporation, random walk, reserve currency, RFID, risk-adjusted returns, Ronald Reagan, Silicon Valley, sovereign wealth fund, special drawing rights, stocks for the long run, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transfer pricing, value at risk, Washington Consensus, Westphalian system

The elite ice-nine plan was far more ambitious than the so-called living wills and resolution authority under the 2010 Dodd-Frank legislation. Ice-nine went beyond banks to include insurance companies, industrial companies, and asset managers. It went beyond orderly liquidation to include a freeze on transactions. Ice-nine would be global rather than case-by-case. The best-known cases of elites’ freezing customer funds in recent years were the Cyprus banking crisis in 2012 and the Greek sovereign debt crisis in 2015. These crises had longer-term antecedents, but Cyprus and Greece were where matters came to a head and banks blocked depositors from their own money. Cyprus was known as a conduit for Russian flight capital, some illegally obtained by Russian oligarchs. In the Cyprus crisis, the two leading banks, Laiki Bank and the Bank of Cyprus, became insolvent.

Goldman also tried to wreck the LTCM bailout deal at the eleventh hour by front-running the Federal Reserve with a competing offer signed by Corzine, Warren Buffett, and AIG head Hank Greenberg. AIG met its own demise in a government bailout in 2008. Cayne and Corzine were among the heads of the “fourteen families,” the fourteen Wall Street banks that participated in the LTCM bailout. The LTCM rescue would not have succeeded without discreet intervention by legendary bank crisis maestro Bill Rhodes, who finessed foreign bankers and finance ministers for loan waivers while the fourteen families squabbled among themselves. Unknown to outsiders, LTCM had arranged almost $1 billion of credit on an unsecured basis from a nineteen-bank international syndicate. To complete the rescue, waivers were needed from those banks in addition to getting the fourteen families to infuse new cash.

Bankers promptly separated themselves into commercial banks that took deposits and made loans, and investment banks that underwrote and sold securities. Separation worked well for sixty-six years and saved the United States from major banking crises. Individual banks such as Continental Illinois in 1984 might fail, and there were still conflicts and loan losses such as the 1980s savings and loan crisis. Still, after Glass-Steagall there was no general banking crisis of the kind seen from 1929 to 1933. Glass-Steagall worked for exactly the reason complexity theory suggests. By breaking the banking system into two parts, Glass-Steagall made each part stronger by shrinking systemic scale, diminishing dense connections, and truncating channels through which failure of one institution jeopardizes all. It was exactly like building watertight compartments in a ship’s hold.


pages: 422 words: 113,830

Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism by Kevin Phillips

algorithmic trading, asset-backed security, bank run, banking crisis, Bernie Madoff, Black Swan, Bretton Woods, BRICs, British Empire, business cycle, buy and hold, collateralized debt obligation, computer age, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency peg, diversification, Doha Development Round, energy security, financial deregulation, financial innovation, fixed income, Francis Fukuyama: the end of history, George Gilder, housing crisis, Hyman Minsky, imperial preference, income inequality, index arbitrage, index fund, interest rate derivative, interest rate swap, Joseph Schumpeter, Kenneth Rogoff, large denomination, Long Term Capital Management, market bubble, Martin Wolf, Menlo Park, mobile money, money market fund, Monroe Doctrine, moral hazard, mortgage debt, Myron Scholes, new economy, oil shale / tar sands, oil shock, old-boy network, peak oil, plutocrats, Plutocrats, Ponzi scheme, profit maximization, Renaissance Technologies, reserve currency, risk tolerance, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, Satyajit Das, shareholder value, short selling, sovereign wealth fund, The Chicago School, Thomas Malthus, too big to fail, trade route

Unfortunately, this included Federal Reserve chairman Alan Greenspan, who smiled permissively at hedge funds, asset bubbles, and the new mortgage gambits, while shunning closer attention to the abuses of mortgage lenders.16 This may be why it took a European, Axel Weber, president of the German Bundesbank, to become the first central banker to explain that the August crisis was just like a classic banking crisis or run, save that it was taking place in the nonbank financial system.17 Washington seems to have ignored a profound and trouble-making transformation. In the meantime, the new nonbank financial sector, or shadow banking system, had also taken over some of the prerogatives formerly reserved to banks of creating money. This explained why some market watchers were giving the various leveraged debt and credit merchants catchy new monetary descriptions.

Profits at private equity firms and consumer finance companies were sure to be shrinking. For some of the big banks, potential loan losses would force them to either set aside more capital in reserves or substantially retrench. Having to take huge losses from SIVs and CDOs onto their books was bad enough, but by year’s end, attention was also turning to potential corporate loan defaults. The Financial Times, comparing possible dimensions of the U.S. banking crisis to those of Japanese banks in the 1990s, calculated the earlier losses of the Japanese banks at $700 billion and speculated that if this decade’s losses rose to $600 billion, that “might represent as much as one-third of the core (tier one) banking capital for U.S. and European banks.”35 What could even make things worse would be if defaults on sub-investment-grade corporate debt surged in 2008 because of a recession.

.; “Islamic Bonds to Get Boost”; “Hong Kong Enters the Race for Islamic Capital,” Financial Times, November 21, 2007. 18 “Currency Blocs Fall into Place,” Financial Times, November 22, 2007. 19 “Morgan Stanley Posts Loss,” New York Times, December 20, 2007. 20 “Putin’s Arctic Invasion,” Daily Mail (London), June 28, 2007. 21 Harley Baker, “Vladimir Putin on Russian Energy Policy,” National Interest, November 2005. 22 “ASPO China Is Formed,” Energy Bulletin, ASPO International, October 30, 2007. 23 Siddarth Varadarajan, “India, China, and the Asian Axis of Oil,” Hindu, January 24, 2006. 24 Flynt Leverett and Pierre Noel, “The New Axis of Oil,” National Interest, July 2006, p. 7. 25 “Ghost Road to Boost India-China Trade,” Financial Times, October 9, 2007. 26 “India to Tell West to Shoulder Climate Change Burden,” Reuters, December 2, 2007. 27 “Climate Is a Risky Issue for Democrats,” Washington Post, November 6, 2007. 28 “Global Oil Output Has Already Peaked, Pickens Says,” Bloomberg News, October 19, 2007. 29 David Pauly, “Slow, Steady Liquidation of the World Oil Industry: David Pauly,” Bloomberg News, October 1, 2007. 30 “No Real Alternative to Oil: Rise in Demand Seems Unavoidable,” International Herald-Tribune, October 29, 2007. 31 “Welcome to a World of Runaway Energy Demand,” Financial Times, November 13, 2007. 32 “No Real Alternative to Oil.” A lot of the alternatives deemed plausible may be unrealistic. 33 Karl Polanyi, The Great Transformation: The Political and Economic Origins of Our Time (Boston: Beacon Press, 2001). 34 “Three Ways to Avoid Wall Street,” Money Morning, November 9, 2007. 35 Gillian Tett, “Japan Offers a Salutary Tale in Banking Crisis,” Financial Times, January 1, 2008. 36 Bill Gross, “Pyramids Crumbling,” Pimco Investment Outlook, January 2008. 37 “The Race Is On to Be Asia’s Number One for Finance,” Financial Times, July 5, 2007. 38 Noriel Roubini and Brad Setser, “Will Bretton Woods 2 Regime Unravel Soon?” www.rge.monitor.com, February 2005. 39 Chris P. Dialynas and Marshall Auerbeck, “Renegade Economics: The Bretton Woods II Fiction,” Pimco Viewpoints, September 2007. 40 “America’s Vulnerable Economy,” Economist, November 15, 2007. 41 “Dollar’s Last Lap as the Only Anchor Currency,” Financial Times, November 25, 2007. 42 John Authers, “The Short View: Weak Dollar,” Financial Times, September 10, 2007. 43 “Why Banking Is an Accident Waiting to Happen,” Financial Times, November 27, 2007. 44 Martin Wolf, “Why the Credit Squeeze Is a Turning Point for the World,” Financial Times, December 11, 2007. 45 “Mortgage Crisis Perplexes Even Shrewd Investor Warren Buffett,” San Francisco Chronicle, December 12, 2007. 46 “European Bosses Warming to Foreign Funds,” Financial Times, December 11, 2007. 47 Nassim Nicholas Taleb, The Black Swan (New York: Random House, 2007). 48 “Does Not Compute: How Misfiring Quant Funds Are Distorting the Markets,” Financial Times, December 9, 2007. 49 Richard Bookstaber, A Demon of Our Own Design (New York: John Wiley & Sons, 2007), pp. 5, 259-60. 50 Mike Muehleck, “Exit U.S.,” www.agorafinancial.com//afrude/.


pages: 379 words: 114,807

The Land Grabbers: The New Fight Over Who Owns the Earth by Fred Pearce

activist lawyer, Asian financial crisis, banking crisis, big-box store, blood diamonds, British Empire, Buy land – they’re not making it any more, Cape to Cairo, carbon footprint, clean water, corporate raider, credit crunch, Deng Xiaoping, Elliott wave, en.wikipedia.org, energy security, farmers can use mobile phones to check market prices, index fund, Jeff Bezos, Kickstarter, land reform, land tenure, Mahatma Gandhi, market fundamentalism, megacity, Mohammed Bouazizi, Nelson Mandela, Nikolai Kondratiev, offshore financial centre, out of africa, quantitative easing, race to the bottom, Ronald Reagan, smart cities, structural adjustment programs, too big to fail, undersea cable, urban planning, urban sprawl, WikiLeaks

It said that food futures—previously a rather humdrum business that helped fund farmers and keep prices stable—had been taken over by speculators in the finance markets, and in the process it had turned into a dangerous beast that bankrupted farmers and caused worsening price volatility. It said that the same kinds of forces that had overwhelmed the world’s banks in 2008 were disrupting food markets too. And there was an extra wrinkle. It appeared that, as the banking crisis escalated, investors seeking a safe haven were buying into commodities and, by 2010, were driving up food prices once more. The argument, in essence, is this. Until the 1980s, there was a mutually supportive relationship between farmers and market traders—a relationship that had existed since the mid-nineteenth century, thanks to the futures contracts system invented at the Chicago Board of Trade.

But the deregulation of financial institutions in the 1980s undermined that relationship, by creating new forms of financial products that allowed speculators who knew nothing about farming or food trade to muscle in on the food futures business. New kinds of financial derivatives were created, somewhat analogous to those behind the subprime mortgage business, whose collapse triggered the 2008 banking crisis. Traditional futures are themselves a form of derivative, of course. But the new forms began in 1991, when Goldman Sachs packaged up commodities futures of all sorts (from coffee and corn to oil and copper) into the Goldman Sachs Commodity Index. It then sold stakes in index funds. By buying them, investors were betting on the future price of a basket of commodities. The first index funds bumped along for years without attracting too much attention.

See also Illovo; Western family Asuncion, Paraguay, 129, 132, 135, 138 Atama Plantation, 88 Australia, 23, 157–61, 178, 182, 192, 238, 266, 267, 272, 289; land grabbed in, 36, 37, 100, 157–61 Australian Agricultural Company, 157 Awash National Park, Ethiopia, 286 Ayoreo Indians, 131, 134–35 Badia, 283–84, 285, 289 Bahia, Brazil, 97, 115, 118–27, 202 Bahrain, 37, 38, 160 Ballve, Teo, 146–47 Bambara, 272, 281 bananas, 33, 56, 95, 188, 189, 192, 235, 272, 280; banana republics, 141–42, 147 Bangladesh, 21 banking crisis of 2008. See also credit crunch Baro River, Ethiopia, 7, 8, 14, 15 Barreiras, Brazil, 119, 120–21, 123, 125, 127 Batwa “pygmies,” 224–25 Bayliss, Peter, 81–85, 88, 90 Beddington, John, 291, 292–95, 301 Bedford Biofuels, 248–49 Bedouin, 35, 283–84 beef, 27, 116, 118, 138, 141, 157–59, 247 Beidahuang Land Cultivation Group, 202 Beigbeder, Charles, 109 Belarus, 110 Benetton family, 149, 151–52, 154 Benin, 88, 202 Bernhard, Prince, 223, 224, 225, 226–67, 230 Bin Laden Group, 33 biodiesel.


pages: 446 words: 117,660

Arguing With Zombies: Economics, Politics, and the Fight for a Better Future by Paul Krugman

affirmative action, Affordable Care Act / Obamacare, Andrei Shleifer, Asian financial crisis, bank run, banking crisis, basic income, Berlin Wall, Bernie Madoff, bitcoin, blockchain, Bonfire of the Vanities, business cycle, capital asset pricing model, carbon footprint, Carmen Reinhart, central bank independence, centre right, Climategate, cognitive dissonance, cryptocurrency, David Ricardo: comparative advantage, different worldview, Donald Trump, Edward Glaeser, employer provided health coverage, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, frictionless, frictionless market, fudge factor, full employment, Growth in a Time of Debt, hiring and firing, illegal immigration, income inequality, index fund, indoor plumbing, invisible hand, job automation, John Snow's cholera map, Joseph Schumpeter, Kenneth Rogoff, knowledge worker, labor-force participation, large denomination, liquidity trap, London Whale, market bubble, market clearing, market fundamentalism, means of production, New Urbanism, obamacare, oil shock, open borders, Paul Samuelson, plutocrats, Plutocrats, Ponzi scheme, price stability, quantitative easing, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, secular stagnation, The Chicago School, The Great Moderation, the map is not the territory, The Wealth of Nations by Adam Smith, trade liberalization, transaction costs, universal basic income, very high income, working-age population

Spain, on the other hand, hasn’t recovered at all. And the lack of recovery translates into fears about Spain’s fiscal future. Should Spain try to break out of this trap by leaving the euro, and re-establishing its own currency? Will it? The answer to both questions is, probably not. Spain would be better off now if it had never adopted the euro—but trying to leave would create a huge banking crisis, as depositors raced to move their money elsewhere. Unless there’s a catastrophic bank crisis anyway—which seems plausible for Greece and increasingly possible in Ireland, but unlikely though not impossible for Spain—it’s hard to see any Spanish government taking the risk of “de-euroizing.” So Spain is in effect a prisoner of the euro, leaving it with no good options. The good news about America is that we aren’t in that kind of trap: we still have our own currency, with all the flexibility that implies.

Well, you need new exports; but to get there you have to give businesses some incentive to do new things, typically by reducing wages and prices relative to those of other countries. If you have your own currency, that’s usually easy: wages are normally set in that currency, so just letting the currency drop on world markets produces an immediate improvement in competitiveness. In fact, that’s what happened in Finland in the early 1990s, when the fall of the Soviet Union and a local banking crisis combined to produce a nasty economic slump. But when things got problematic for Finland after 2008, the country no longer had its own currency. Neither did, for example, Spain, discussed in the first article in this section. So their only way out was a long, painful slog of reducing wages in the face of high unemployment. The idea that there is a difficult economic trade-off between the convenience of a shared currency and its disadvantages when trouble hits has another ugly but useful name, the theory of “optimum currency areas.”


pages: 403 words: 119,206

Toward Rational Exuberance: The Evolution of the Modern Stock Market by B. Mark Smith

bank run, banking crisis, business climate, business cycle, buy and hold, capital asset pricing model, compound rate of return, computerized trading, credit crunch, cuban missile crisis, discounted cash flows, diversified portfolio, Donald Trump, Eugene Fama: efficient market hypothesis, financial independence, financial innovation, fixed income, full employment, income inequality, index arbitrage, index fund, joint-stock company, locking in a profit, Long Term Capital Management, Louis Bachelier, margin call, market clearing, merger arbitrage, money market fund, Myron Scholes, Paul Samuelson, price stability, random walk, Richard Thaler, risk tolerance, Robert Bork, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, stocks for the long run, the market place, transaction costs

The substantial amounts of capital needed to finance the new industry required large numbers of stockholders and greatly increased the importance of an open stock market, accessible to all investors. By 1837 the United States had more miles of completed railroads than any other country. But in that year the nation experienced a very unpleasant shock—a severe stock market crash. The nation’s unstable banking system, consisting of poorly regulated state-chartered banks, collapsed under the burden of rampant speculation in western lands and in the new railroads. The banking crisis pulled down the stock market and left a bitter hangover in the form of a depression that would last six years. The rapid stock price fluctuations of the period also brought to the fore a new type of professional market participant, more interested in exploiting short-term moves in share prices than in executing orders for outside investors. A former clerk named Jacob Little was the most prominent of the new breed, and was soon almost universally despised in the small Wall Street community.

Charles Morse, convicted of malfeasance and misappropriation for his role in the management of the banks he had controlled, served a term in the Atlanta Federal Penitentiary. The 1907 panic, like those that had preceded it, exposed dangerous defects in the financial system. More and more, voices began to be heard urging some sort of governmental response to avoid a repetition of the crisis. Prominent Republican Senator Nelson W. Aldrich said, “Something has got to be done. We may not always have Pierpont Morgan with us to meet [another] banking crisis.”13 Morgan himself did not disagree. His aide and son-in-law Herbert Satterlee summed up Morgan’s attitude: “It was not a good pattern—no one knew that as well as he—but it was the pattern in which he had found it. From that moment he worked to make it better and less vulnerable in bad times or periods of overspeculation. He realized that it must be buttressed against disclosures of dishonesty or irregularity and consequent loss of prestige and the confidence of the public.

Like detectives quietly seeking to ferret out information, Heimann and his auditors probed for weak links among the banks that had lent money to the Hunts and soon found one. The First National Bank of Chicago already had serious problems, created by bad investments and the extremely high interest rates that then prevailed. It also had large loans outstanding to the Hunts. Rumors began to circulate that the bank might be in trouble. Heimann knew that he faced a potential crisis. In 1907, J. P. Morgan had worked frantically to stem a banking crisis precipitated by panicky withdrawals from banks and trust companies by small depositors. By 1980 small depositors were protected by Federal Deposit Insurance up to $50,000 and were thus unlikely to panic. But all major banks held deposits that were significantly greater than $50,000, and many of these deposits were controlled by relatively sophisticated managers who made it their business to be aware of the financial condition of the institutions in which they had placed their funds.


pages: 1,335 words: 336,772

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

always be closing, bank run, banking crisis, Big bang: deregulation of the City of London, Bolshevik threat, Boycotts of Israel, Bretton Woods, British Empire, buy and hold, California gold rush, capital controls, Charles Lindbergh, collective bargaining, corporate raider, Etonian, financial deregulation, fixed income, German hyperinflation, index arbitrage, interest rate swap, margin call, money market fund, Monroe Doctrine, North Sea oil, oil shale / tar sands, old-boy network, paper trading, plutocrats, Plutocrats, Robert Gordon, Ronald Reagan, short selling, strikebreaker, the market place, the payments system, too big to fail, transcontinental railway, undersea cable, Yom Kippur War, young professional

As the Richmond convention progressed, emergency telegrams came in thick and fast from 23 Wall Street. Morgan’s friend Bishop William Lawrence noted in his diary how Morgan would study the telegrams, place his palms on the table, then stare fixedly ahead. Though Pierpont was needed on Wall Street, his partners feared a premature return might itself touch off a panic. By Saturday, October 19, he decided to rush back by private railroad car to deal with a spreading bank crisis. “They are in trouble in New York,” he told Bishop Lawrence. “They do not know what to do, and I don’t know what to do, but I am going back.”3 The 1907 panic was Pierpont’s last hurrah. Although semiretired, reporting to work periodically for only an hour or two, he suddenly functioned as America’s central bank. Within two week’s time, he saved several trust companies and a leading brokerage house, bailed out New York City, and rescued the Stock Exchange.

Sharp drops in the money supply then led to severe recessions. The country needed an elastic currency and a permanent lender of last resort. From the ashes of 1907 arose the Federal Reserve System: everybody saw that thrilling rescues by corpulent old tycoons were a tenuous prop for the banking system. Senator Nelson W. Aldrich declared, “Something has got to be done. We may not always have Pierpont Morgan with us to meet a banking crisis.”18 By confirming his storied powers, Pierpont also inadvertently fostered talk of an omnipotent Wall Street money trust. President Roosevelt now recommended federal regulation of the stock exchanges, while New York governor Charles Evans Hughes wanted margin requirements raised from 10 to 20 percent. If these suggestions had been enacted, the country might have been spared some of the lurid excesses of the 1929 crash.

In the end, the pool went ahead and made a tidy profit. The hearings would drag on and eventually assume dimensions unforeseen in early 1932. 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.


pages: 756 words: 120,818

The Levelling: What’s Next After Globalization by Michael O’sullivan

"Robert Solow", 3D printing, Airbnb, algorithmic trading, bank run, banking crisis, barriers to entry, Bernie Sanders, bitcoin, Black Swan, blockchain, Boris Johnson, Branko Milanovic, Bretton Woods, British Empire, business cycle, business process, capital controls, Celtic Tiger, central bank independence, cloud computing, continuation of politics by other means, corporate governance, credit crunch, cryptocurrency, deglobalization, deindustrialization, disruptive innovation, distributed ledger, Donald Trump, eurozone crisis, financial innovation, first-past-the-post, fixed income, Geoffrey West, Santa Fe Institute, Gini coefficient, global value chain, housing crisis, income inequality, Intergovernmental Panel on Climate Change (IPCC), knowledge economy, liberal world order, Long Term Capital Management, longitudinal study, market bubble, minimum wage unemployment, new economy, Northern Rock, offshore financial centre, open economy, pattern recognition, Peace of Westphalia, performance metric, private military company, quantitative easing, race to the bottom, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, Scramble for Africa, secular stagnation, Silicon Valley, Sinatra Doctrine, South China Sea, South Sea Bubble, special drawing rights, supply-chain management, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, total factor productivity, trade liberalization, tulip mania, Valery Gerasimov, Washington Consensus

Independently, three German social scientists have also examined how politics changes after financial crisis.2 Using data going back 140 years, they chart a sharp rise in support for (usually new) politically radical (usually far-right) parties in the aftermath of financial crises, finding that on average far-right parties tend to see a 30 percent rise in their vote following a financial crisis (though apparently this effect fades five years after the crisis). The rise of Sweden’s New Democracy Party after the 1990 banking crisis and the popularity of Italy’s Northern League during the same period are examples, as are the rises of the alt-right in the United States, the Five Star Movement in Italy, the Podemos and Ciudadanos Parties in Spain, and the True Finns in Finland. They also find that incidents of unrest (riots, street protests) tend to be higher after a financial crisis. Unsurprisingly, there has been a rise in political violence in the United States, for example (mostly from the Far Right), according to the University of Maryland Global Terrorism Database.3 I would speculate that one contemporary departure from history may be that today much of the violence or protest associated with political unrest is found not on the streets but online.

Quick adjustments to stock market regulation and currency management in China have highlighted how quickly Beijing has been to learn market communication. Policy makers in China have doubtless been absorbing lessons from what developed world central banks have done over the past ten years in respect of the extraordinary measures taken to combat debt crises. In particular, if China has learned from Europe’s crisis, it will know, first, that it must not end a debt and banking crisis with large amounts of debt on the government balance sheet, and, second, that it must not allow the burden of economic pain to fall on the ordinary man and woman lest that provoke social unrest. Looking ahead, there are two components to the political impetus in China. The first, overriding one is the goal of advancing China and increasing its prestige, or its dream, to be consistent. This may sound obvious, but it is a common, driving factor across China’s political class and is internalized across the country.

The second issue is that Ireland still regularly suffers from imbalances in its economy, the most obvious one today being that house prices and rental charges are higher than during its bubble period, and that there is a resulting housing crisis. Ireland’s overheated property market is one area where it can learn from other small countries. In the past it has found it too easy to copy the policy model of the United Kingdom and has ignored the lessons of other small open countries (notably, the Scandinavian banking crisis of the 1990s came to the notice of Irish policy makers only after the collapse of the Celtic Tiger). Brexit will, naturally, change this. As regards housing, Ireland as a country still needs to decide that “houses are for living in, not for speculation,” to quote a recent remark from China’s president.8 It must then act accordingly from a fiscal and regulatory point of view. A further challenge is to build up the domestic economic sector.


The Fix: How Bankers Lied, Cheated and Colluded to Rig the World's Most Important Number (Bloomberg) by Liam Vaughan, Gavin Finch

asset allocation, asset-backed security, bank run, banking crisis, Bernie Sanders, Big bang: deregulation of the City of London, buy low sell high, call centre, central bank independence, collapse of Lehman Brothers, corporate governance, credit crunch, Credit Default Swap, eurozone crisis, fear of failure, financial deregulation, financial innovation, fixed income, interest rate derivative, interest rate swap, Kickstarter, light touch regulation, London Interbank Offered Rate, London Whale, mortgage debt, Northern Rock, performance metric, Ponzi scheme, Ronald Reagan, social intelligence, sovereign wealth fund, urban sprawl

Privately, at least one director at the Bank of England felt Tucker was justified in issuing the order if it meant buying Barclays more time to avoid nationalization, potentially saving U.K. taxpayers billions of pounds. In other words, the end justified the means. It would not be the first time the Bank of England had cast aside normal standards of propriety in the interest of what it perceived to be the greater good. When property prices crashed in the so-called secondary banking crisis of the mid-1970s, then-Governor Gordon Richardson propped up ailing banks with a raft of loans that were kept secret from the public in an attempt to contain the problem until markets recovered. It worked, and, when his career came to an end two decades later, Richardson described it privately as his crowning achievement. For his part, Diamond has always maintained that he never took Tucker’s words as a direct order to start lowballing Libor.21 That impression,he says,began on a call with his most trusted lieutenant later that day. ■ ■ ■ Jerry Del Missier joined Barclays the year after Diamond, and any credit Diamond deserves for the rapid growth of the investment bank must be shared with the small, intense Canadian.

Read would later say in court that, in reality, they never had. It wasn’t necessarily that Hayes’s two most trusted brokers were unwilling to help him out, but rather that conditions had fundamentally changed. Banks were awash with cheap central bank money, interest rates were back at close to zero, and the cash markets were stable. The turmoil that had been such a feature of the market since the onset of the banking crisis in 2007 had dissipated. The rate-setters no longer needed Goodman or Farr to tell them where cash was trading since yen Libor barely moved at all anymore. News of the CFTC’s investigation was also starting to filter down, making everybody nervous. Even Adolph, the Deutsche Bank trader who’d been so helpful in the past, would soon start rebuffing him. When 118 THE FIX Hayes asked for assistance, the Frenchman wrote back bluntly: “I have no influence or control, nor I want to be involved.” 13 Just after 4 p.m. in Tokyo, as his colleagues started to head home for the evening, Hayes stayed on at his desk determined to find a way to get the three-month rate lower.


pages: 267 words: 72,552

Reinventing Capitalism in the Age of Big Data by Viktor Mayer-Schönberger, Thomas Ramge

accounting loophole / creative accounting, Air France Flight 447, Airbnb, Alvin Roth, Atul Gawande, augmented reality, banking crisis, basic income, Bayesian statistics, bitcoin, blockchain, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, Cass Sunstein, centralized clearinghouse, Checklist Manifesto, cloud computing, cognitive bias, conceptual framework, creative destruction, Daniel Kahneman / Amos Tversky, disruptive innovation, Donald Trump, double entry bookkeeping, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, Ford paid five dollars a day, Frederick Winslow Taylor, fundamental attribution error, George Akerlof, gig economy, Google Glasses, information asymmetry, interchangeable parts, invention of the telegraph, inventory management, invisible hand, James Watt: steam engine, Jeff Bezos, job automation, job satisfaction, joint-stock company, Joseph Schumpeter, Kickstarter, knowledge worker, labor-force participation, land reform, lone genius, low cost airline, low cost carrier, Marc Andreessen, market bubble, market design, market fundamentalism, means of production, meta analysis, meta-analysis, Moneyball by Michael Lewis explains big data, multi-sided market, natural language processing, Network effects, Norbert Wiener, offshore financial centre, Parag Khanna, payday loans, peer-to-peer lending, Peter Thiel, Ponzi scheme, prediction markets, price anchoring, price mechanism, purchasing power parity, random walk, recommendation engine, Richard Thaler, ride hailing / ride sharing, Sam Altman, Second Machine Age, self-driving car, Silicon Valley, Silicon Valley startup, six sigma, smart grid, smart meter, Snapchat, statistical model, Steve Jobs, technoutopianism, The Future of Employment, The Market for Lemons, The Nature of the Firm, transaction costs, universal basic income, William Langewiesche, Y Combinator

Like the confluence of the three distinct phenomena that led to the 1991 weather event, three distinct but reinforcing threats may turn banking on its head. Each one alone is a challenge, but taken together, they may wipe out a significant portion of the industry. The first is the structural weakness of the banking sector, which was exposed by the subprime mortgage crisis beginning in 2007. This banking crisis was caused at least in part by information that was either incorrect and incomplete or wrongly interpreted. According to one estimate, more than $8 trillion was lost, and there were extensive bank bailouts in a number of advanced economies. In the United States, the Emergency Economic Stabilization Act of 2008 led to the federal government’s earmarking more than $700 billion in loans to help ailing banks.

See Cybersyn Systemized Intelligence Lab, 115 Taj Mahal, 21 talent management, internal, 126–129 tax credits, 200–202, 218 taxes, 197–202 capital gains, 187 data, 199–200, 203, 218 negative income, 190 nominal rate, 198 progressive consumption, 198 robo, 186–187 wealth, 187 Taylor, Frederick Winslow, 89, 95–96 Taylorism, 89, 95–96, 112 telecommunications industry, 162–163 Tesla, 78, 110, 120, 169, 189 thalidomide, 42 thick markets, 2, 82–83, 164, 213 Thiel, Peter, 203 time firm reorganization and, 112–113 meaningful use of, 221–222 Tinder, 83, 163 µ Torrent, 122 TransferWise, 135 transparency, 172, 173, 178 Trump, Donald, 186, 203 Trunk Club, 211 T-shaped skill set, 118 Tversky, Amos, 102 Twitter, 163 Uber, 163, 182 UBI. See universal basic income UniCredit bank, 136 Unilever, 75 United Kingdom, 134, 147, 164 United States banking crisis in, 134, 135 capital share of, 185 corporate taxes in, 197–198 health care sector in, 213 labor market of, 184, 185, 186, 195 market concentration in, 164 stock market investment options in, 143 subprime mortgage crisis in (see subprime mortgage crisis) universal basic income proposed in, 190, 191 universal basic income (UBI), 189–193, 205–206 University of Pennsylvania’s Wharton School, 36 Upstart, 151 Upwork, 3 used car market, 40 venture capital (VC) firms, 141, 142–143, 216 Vocatus, 55 Volkswagen, 182 Volvo, 182 Wall Street Journal, 203 Walmart, 28, 52 Walt Disney Company, 69 Watson (machine learning system), 109, 111, 113–114, 115, 117, 163, 183 Watt, James, 111, 113 wealth tax, 187 Webvan, 112 WeChat, 147, 163 Wedgwood, Josiah, 94 welfare reducing transactions, 73 Wenger, Albert, 156, 189 Wenig, Devin, 1–2, 209 Wharton School, 36 Which?


pages: 265 words: 74,941

The Great Reset: How the Post-Crash Economy Will Change the Way We Live and Work by Richard Florida

banking crisis, big-box store, blue-collar work, business cycle, car-free, carbon footprint, collapse of Lehman Brothers, congestion charging, creative destruction, deskilling, edge city, Edward Glaeser, falling living standards, financial innovation, Ford paid five dollars a day, high net worth, Home mortgage interest deduction, housing crisis, if you build it, they will come, income inequality, indoor plumbing, interchangeable parts, invention of the telephone, Jane Jacobs, Joseph Schumpeter, knowledge economy, low skilled workers, manufacturing employment, McMansion, Menlo Park, Nate Silver, New Economic Geography, new economy, New Urbanism, oil shock, Own Your Own Home, pattern recognition, peak oil, Ponzi scheme, post-industrial society, postindustrial economy, reserve currency, Richard Florida, Robert Shiller, Robert Shiller, secular stagnation, Silicon Valley, Silicon Valley startup, social intelligence, sovereign wealth fund, starchitect, the built environment, The Wealth of Nations by Adam Smith, Thomas L Friedman, total factor productivity, urban decay, urban planning, urban renewal, white flight, young professional, Zipcar

Chapter Two The Crisis Most Like Our Own The historian Scott Reynolds Nelson writes that today’s crisis most closely resembles the Long Depression of 1873.1 Our “current economic woes look a lot like what my 96-year-old grandmother still calls ‘the real Great Depression,’” he says. “She pinched pennies in the 1930s, but she says that times were not nearly as bad as the depression her grandparents went through…. It looks much more like our current crisis.” That nineteenth-century downturn began as a banking crisis brought on by insolvent mortgages and complex financial instruments (sound familiar?) quickly spread to the entire economy, leading to widespread and prolonged unemployment. As long and as painful as it was, that crisis spurred a period of incredible inventiveness. When one economist mapped patented U.S. inventions back through the early nineteenth century, he found a huge spike in the 1870s.

Wachovia was going to clear out the huge northeast Charlotte campus and the downtown offices entirely, but they decided instead to ‘consolidate’ their work force to just the northeast Charlotte campus. While this was a blow to real estate rental prices in the handful of towers downtown, it meant many more people have kept their steady jobs than anyone initially thought.” While job losses of as much as 80 percent were anticipated, they ultimately came in at less than 20 percent, Strumsky points out. Bank of America took “to the banking crisis like a shopaholic with a new credit card—bargain hunting and cutting some astonishing deals,” Strumsky adds. It was also slow to cut jobs, because North Carolina law mandates that so-called mass layoffs must be publicly announced, which created worry about the effects of job cuts on the company’s already troubled stock price, she said. Instead the company “picked and chose personnel carefully and laid off about twenty workers a week and held the stock price steady, eliminating only their lowest-performing workers, since they had to apply some serious scrutiny to who was let go.”


pages: 280 words: 74,559

Fully Automated Luxury Communism by Aaron Bastani

"Robert Solow", autonomous vehicles, banking crisis, basic income, Berlin Wall, Bernie Sanders, Bretton Woods, capital controls, cashless society, central bank independence, collapse of Lehman Brothers, computer age, computer vision, David Ricardo: comparative advantage, decarbonisation, dematerialisation, Donald Trump, double helix, Elon Musk, energy transition, Erik Brynjolfsson, financial independence, Francis Fukuyama: the end of history, future of work, G4S, housing crisis, income inequality, industrial robot, Intergovernmental Panel on Climate Change (IPCC), Internet of things, Isaac Newton, James Watt: steam engine, Jeff Bezos, job automation, John Markoff, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kevin Kelly, Kuiper Belt, land reform, liberal capitalism, low earth orbit, low skilled workers, M-Pesa, market fundamentalism, means of production, mobile money, more computing power than Apollo, new economy, off grid, pattern recognition, Peter H. Diamandis: Planetary Resources, post scarcity, post-work, price mechanism, price stability, private space industry, Productivity paradox, profit motive, race to the bottom, RFID, rising living standards, Second Machine Age, self-driving car, sensor fusion, shareholder value, Silicon Valley, Simon Kuznets, Slavoj Žižek, stem cell, Stewart Brand, technoutopianism, the built environment, the scientific method, The Wealth of Nations by Adam Smith, Thomas Malthus, transatlantic slave trade, Travis Kalanick, universal basic income, V2 rocket, Watson beat the top human players on Jeopardy!, Whole Earth Catalog, working-age population

As the state gives way to the market this is accompanied by a nebulous sense of loss, as a crisis of representation empties democratic institutions of authority and citizens come to view them as little more than conduits for the interests of corrupt elites. This entrenches the tendencies of globalisation as previous, if imperfect, repositories of accountability – national governments – lose the consent of those they represent. In the supposedly good times something had gone badly wrong – but it remained an undercurrent. 2008: Return of History Almost two decades after Fukuyama’s false prophecy, that decisively changed: a banking crisis, a debt crisis, a deficit crisis – all culminating in the imposition of austerity, from Greece to California. Alongside that was war in Georgia, the flowering of the Arab Spring, uprising in the Ukraine, insurrection – and then the most bloody of civil wars – in Syria. Elsewhere previously low-intensity conflict in Iraq and Afghanistan deteriorated further, soon joined by similarly hazy struggles in Libya and Yemen.

Elsewhere the likes of Brazil and Russia have been mired in recession almost as severe as parts of Europe, the only difference being their economic malaise has kicked in at far lower levels of relative development. Such a shift has only served to strengthen the forces of autocracy. So our world is one increasingly defined by low growth, low productivity and low wages. Before the crisis, most policy-makers would have thought such events impossible, let alone speculated about an appropriate response. Alan Greenspan’s 2008 remarks to the US House of Representatives are illustrative: the banking crisis having left this former chairman of the Federal Reserve in a state of ‘shocked disbelief’ and ‘distressed’ by events he previously viewed as impossible. While neoliberalism, which emerged with the Thatcher and Reagan governments, led to higher unemployment and lower wage growth, for more than a generation this was mitigated by access to cheaper goods and services – by relocating production to countries with lower wages – as well as inflated asset prices, particularly housing, and access to cheap mortgage and consumer debt.


pages: 264 words: 76,643

The Growth Delusion: Wealth, Poverty, and the Well-Being of Nations by David Pilling

Airbnb, banking crisis, Bernie Sanders, Big bang: deregulation of the City of London, Branko Milanovic, call centre, centre right, clean water, collapse of Lehman Brothers, collateralized debt obligation, commoditize, Credit Default Swap, credit default swaps / collateralized debt obligations, dark matter, Deng Xiaoping, Diane Coyle, Donald Trump, double entry bookkeeping, Erik Brynjolfsson, falling living standards, financial deregulation, financial intermediation, financial repression, Gini coefficient, Goldman Sachs: Vampire Squid, Google Hangouts, Hans Rosling, happiness index / gross national happiness, income inequality, income per capita, informal economy, invisible hand, job satisfaction, Mahatma Gandhi, market fundamentalism, Martin Wolf, means of production, Monkeys Reject Unequal Pay, mortgage debt, off grid, old-boy network, Panopticon Jeremy Bentham, peak oil, performance metric, pez dispenser, profit motive, purchasing power parity, race to the bottom, rent-seeking, Robert Gordon, Ronald Reagan, Rory Sutherland, science of happiness, shareholder value, sharing economy, Simon Kuznets, sovereign wealth fund, The Great Moderation, The Wealth of Nations by Adam Smith, Thomas Malthus, total factor productivity, transaction costs, transfer pricing, trickle-down economics, urban sprawl, women in the workforce, World Values Survey

I asked whether he thought conventional accounting had overstated the contribution of banks to the economy. “It would take someone with more expertise than me,” he said. “This is a complicated issue.” Then he added, as if it might be of some comfort, “I think we have limited possibility of the same crisis. Probably the next financial crisis will be a little bit different.” * * * — Just to be absolutely clear: the 2008 banking crisis, whose effects were still rippling through the world nearly a decade later, cannot be blamed on the way we account for financial services in our national accounts. The crisis had its roots in race-to-the-bottom deregulation, naive faith in the capacity of markets to self-correct, and a perverse “shareholder-value” ideology that allowed a few thousand masters-of-the-universe bankers to ransack their own institutions while simultaneously feeling good about themselves.

This was the practice of dicing and slicing different revenue streams and smushing them together into a tradable asset, a practice that severed the traditional link between lender and borrower. After a while people were happily trading bits of paper—all triple-A rated, naturally—blissfully unaware of what the underlying assets actually contained. As we now know, much of it was mortgage debt taken out on homes by people who could not afford to make their payments. Yet the banking crisis was linked to national accounting in two important ways. The first is as much psychological as anything else. This is what you might call the danger of the circular argument, one that goes like this: “We all know growth is good. Growth is measured by GDP. So when GDP is going up that must be good. Giving free rein to banks to do their thing is a recipe for higher GDP. Ergo giving free rein to banks must be good.”


Blindside: How to Anticipate Forcing Events and Wild Cards in Global Politics by Francis Fukuyama

Asian financial crisis, banking crisis, Berlin Wall, Bretton Woods, British Empire, business cycle, capital controls, Carmen Reinhart, cognitive bias, cuban missile crisis, energy security, flex fuel, global pandemic, income per capita, informal economy, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John von Neumann, mass immigration, Menlo Park, Mikhail Gorbachev, moral hazard, Norbert Wiener, oil rush, oil shale / tar sands, oil shock, packet switching, RAND corporation, Ray Kurzweil, reserve currency, Ronald Reagan, The Wisdom of Crowds, trade route, Vannevar Bush, Vernor Vinge, Yom Kippur War

Suffice it to say that many factors came into play: currency speculators caused a good deal of trouble but were able to do so only because some currencies were deliberately undervalued for the purpose of spurring exports, and some economies were overleveraged in dollar lending amid frailties in newly liberalized financial sectors. The consequences of the crisis were devastating. The East Asian recession during 1998 was the most severe in modern history. Real GDP fell by 13.1 percent in Indonesia, 10.5 percent in Thailand, 7.4 percent in Malaysia, and 0.6 percent in Philippines. Singapore also suffered a contraction of 0.9 percent of GDP even though it did not experience a banking crisis. Investment fell by 44.3 percent in Thailand, 44.0 percent in Malaysia, 33.0 percent in Indonesia, and 11.2 percent in the Philippines. Consumption also declined because of job losses and the collapse in credit availability—by 11.5 percent in Thailand, 10.2 percent in Malaysia, 6.2 percent in Indonesia, and 3.4 percent in Singapore. The large currency declines improved the competitive position of most Asian countries, but export growth did not rebound quickly in most cases.

On the contrary, the IMF 2990-7 ch05 hale 7/23/07 12:09 PM Page 49 econoshocks: the east asian crisis case 49 programs forced countries to pursue microeconomic reforms that opened the door to more engagement with the global economy, including reduced trade protection and expanded opportunities for foreign direct investment. As a result, East Asia enjoyed a sustained recovery after 1999 and was able to restore the health of its domestic financial system. The country that experienced the largest devaluation and the greatest banking crisis, Indonesia, has been able to reduce its government debt from 92 percent of GDP in 2000 to 46 percent currently. The crisis had produced other significant side effects, some, as suggested earlier, with profound consequences for the current balance-of-payments equilibrium of the world economy. After the crisis, the investment ratios of East Asia never fully recovered. Except for China and Vietnam, investment ratios in most East Asian countries are still 5–10 percent below their levels of the early 1990s.


pages: 270 words: 73,485

Hubris: Why Economists Failed to Predict the Crisis and How to Avoid the Next One by Meghnad Desai

"Robert Solow", 3D printing, bank run, banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, BRICs, British Empire, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, correlation coefficient, correlation does not imply causation, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, demographic dividend, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, Fall of the Berlin Wall, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, German hyperinflation, Gunnar Myrdal, Home mortgage interest deduction, imperial preference, income inequality, inflation targeting, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, Long Term Capital Management, market bubble, market clearing, means of production, Mexican peso crisis / tequila crisis, mortgage debt, Myron Scholes, negative equity, Northern Rock, oil shale / tar sands, oil shock, open economy, Paul Samuelson, price stability, purchasing power parity, pushing on a string, quantitative easing, reserve currency, rising living standards, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, seigniorage, Silicon Valley, Simon Kuznets, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, women in the workforce

See Andrew Ross Sorkin, Too Big to Fail (Viking, New York, 2009); Raghuram Rajan, Fault Lines: How Hidden Fractures Still Threaten the World Economy (Princeton University Press, Princeton, NJ, 2010). 6.Alan Greenspan’s testimony to the Senate Committee on Oversight and Government Reform, US House of Representatives, October 23, 2008. See also Alan Greenspan, The Age of Turbulence, with a new epilogue (Penguin, New York, 2008). 7.Financial Services Authority, The Turner Review: A Regulatory Response to the Global Banking Crisis (Financial Services Authority, London, 2009), p. 39. 8.The case for the Keynesians is argued by Robert Skidelsky, Keynes: The Return of the Master (Penguin, London, 2009). 9.Milton Friedman and Anna Schwartz, A Monetary History of the United States 1867–1960 (Princeton University Press, Princeton, NJ, 1963). 10.For the background to the euro, see David Marsh, The Euro: The Battle for the New Global Currency (Yale University Press, New Haven, CT, 2009). 7 The Search for an Answer 1.Thomas Piketty, Capital in the Twenty-First Century (Belknap Press, Cambridge, MA, 2014), see figure 6.1, p. 200; figure 6.2, p. 201; figure 8.5, p. 291. 2.Meghnad Desai, “An Econometric Model of the Share of Wages in National Income: UK 1855–1965” (1984), republished in The Selected Essays of Meghnad Desai, vol. 1: Macroeconomics and Monetary Theory (Edward Elgar, Cheltenham, 1995). 3.Andrew Glyn and Robert Sutcliffe, “The Collapse of UK Profits,” New Left Review, 66 (Mar.

Lévy, “The Crisis of the Early 21st Century: Marxian Perspectives.” In R. Bellofiore and G. Vertova, eds, The Great Recession and the Contradictions of Contemporary Capitalism, pp. 26–49. Edward Elgar, Cheltenham, 2014. Eatwell, J., M. Millgate, and P. Newman, eds, The New Palgrave Dictionary of Economics. Macmillan, London, 1987. Financial Services Authority, The Turner Review: A Regulatory Response to the Global Banking Crisis. Financial Services Authority, London, 2009. Floud, R. and D. McCloskey, eds, The Economic History of Modern Britain since 1700. 2nd edn. 3 vols. Cambridge University Press, Cambridge, 1994. Friedman M., “The Role of Monetary Policy,” American Economic Review, 58.1 (Mar. 1968): 1–17. Friedman, M., A Theory of the Consumption Function. Princeton University Press, Princeton, NJ, 1957. Friedman, M. and D.


pages: 934 words: 135,736

The Divided Nation: A History of Germany, 1918-1990 by Mary Fulbrook

Albert Einstein, banking crisis, Berlin Wall, centre right, coherent worldview, collective bargaining, deindustrialization, Fall of the Berlin Wall, feminist movement, first-past-the-post, fixed income, full employment, joint-stock company, land reform, means of production, Mikhail Gorbachev, open borders, Peace of Westphalia, Sinatra Doctrine, union organizing, unorthodox policies

Page 395 INDEX A Ackermann, Anton, 188 Adenauer, Konrad: re-emergence after Third Reich, 359; as leader of CDU and elected Chancellor, 139, 163; the Adenauer period, 17588 passim; declining years, Spiegel affair and retirement 1978; willingness to accept former Nazis in political life, 279; and western integration, 17588 passim, 307, 364 ADGB (Allgemeiner Deutscher Gewerkschaftsbund), see Trade Unions Adorno, Theodor, 38, 281 Africa, 100, 103 Ahlen Programme, 138 Allied war-time planning on Germany, 1301 Alsace-Lorraine, 31 Andersch, Alfred, 297 Anschluss of Austria, 923 Antifas, 1356, 159 anti-Semitism: Hitler's, 51, 86; in Third Reich, 879; in Austria, 92; Holocaust, 10320; in GDR, 276; in FRG, 287; see also Jews, Holocaust APO (Extra-parliamentary Opposition), 282 appeasement, 925, 99 armistice, 26 Army: in Imperial Germany, 20, 23; in Weimar Republic, 26, 27, 31, 32, 489, 58, 64; in Third Reich, 712, 8995; in World War Two, 96125 passim in Federal Republic of Germany, 178, 279; in GDR, 180; in both Germanies after 1949, 25864 passim, 353, 35960 Attlee, Clement, 133 Auschwitz, 1067, 11113, 368; see also Concentration Camps, Holocaust Austria: exclusion from 'small Germany' in 1871, 3; forbidden union with Germany under Treaty of Versailles, 31; and banking crisis of 1931, 57; attempted coup by Austrian Nazis in 1934, 90; Anschluss with Germany in 1938, 923; as separate German-speaking state, 291; concentration camps in, 304; border with Hungary opened in 1990, 3234 Axel Springer Press, 282, 296 Axis powers, 90; see also Tripartite Pact B Baader, Andreas, 211, 2846 Bad Godesberg Programme, 186 Baden, Prince Max von, 24, 25 Bahro, Rudolf, 26970, 320, 365 Baltic States, 936 banking crisis (1931), 57 Barschel, Uwe, 214 Barzel, Rainer, 209 Basic Law (Grundgesetz), 148, 163, 16871 passim, 209, 253, 2611, 307, 338, 341 Basic Treaty (1972), 209 Battle of Britain, 99 Bauer, Gustav, 31 Bauhaus, 39 Bausoldaten, 224, 260, 274 Baylis, T., 251 BDM (Bund Deutscher Mädel), 77 Becher, Johannes, 292 Beck, Ludwig, 91 Becker, Jurek, 294 Page 396 Beer Hall Putsch (1923), 35, 88, 98 Behrens, Fritz, 193, 202 Belgium, 36, 98 Belzec, 110; see also Concentration Camps Benary, Arne, 193, 202 Benjamin, Walter, 38 Berchtesgaden, 70 Bergen-Belsen, 117, 306; see also Concentration Camps Berghahn, Volker, 85 Beria, L.

Brüning's priority nevertheless remained that of showing that Germany was unable to pay reparations, whatever the cost in human misery, misery which could have been alleviated by public expenditure programmes and less deflationary policies. In the summer of 1931, the economic situation was further exacerbated by a financial crisis. A failed attempt at a German Austrian customs union led to a withdrawal of French credits from Austria, precipitating a collapse of the main Austrian bank, a rush of bankruptcies in Austria and Germany, and a banking crisis, which necessitated a 'bank holiday' of three weeks duration in July 1931. In the midst of this mounting economic chaos, politics was increasingly played out not in parliament but on the Page 58 streets. Skirmishes took place between rival political gangs: most frequently, the paramilitary organizations of the KPD joined violent battle with the unruly SA units. Hitler, in an attempt to retain the air of respectability cultivated over the preceding few years, now made concerted efforts to improve his relations with conservative elites: the army, agricultural landowners, leaders of industry.


pages: 466 words: 127,728

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

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, business cycle, buy and hold, 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, fixed income, Flash crash, floating exchange rates, forward guidance, G4S, George Akerlof, global reserve currency, global supply chain, Growth in a Time of Debt, income inequality, inflation targeting, information asymmetry, invisible hand, jitney, John Meriwether, Kenneth Rogoff, labor-force participation, 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 market fund, 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, undersea cable, uranium enrichment, Washington Consensus, working-age population, yield curve

Deflation slows nominal GDP growth, while nominal debt rises every year due to budget deficits. This tends to increase the debt-to-GDP ratio, placing the United States on the same path as Greece and making a sovereign debt crisis more likely. Deflation also increases the real value of private debt, creating a wave of defaults and bankruptcies. These losses then fall on the banks, causing a banking crisis. Since the primary mandate of the Federal Reserve is to prop up the banking system, deflation must be avoided because it induces bad debts that threaten bank solvency. Finally, deflation feeds on itself and is nearly impossible for the Fed to reverse. The Federal Reserve is confident about its ability to control inflation, although the lessons of the 1970s show that extreme measures may be required.

After three years of on-again, off-again crises and contagion, the solution was finally found in the troika of the IMF, the ECB, and the EU, backstopped by Germany. The IMF obtained its funds by borrowing from nations with healthy reserve balances, such as China and Canada. The EU raised funds by pooling member resources, largely from Germany. Finally, the ECB created funds by printing money as needed. The troika members operated under the central bankers’ new mantra, “Whatever it takes.” By late 2012, the European sovereign debt and bank crisis was largely contained, although rebuilding bank balance sheets and making the required structural adjustments will take years to complete. Despite this turmoil, the euro held up quite well, to the surprise of many analysts and investors, especially those in the United States. In July 2008 the euro reached a peak of $1.60 and remained in a trading range between $1.20 and $1.60 during the sovereign debt crisis.

Those who believe that bank deposit risk is a thing of the past should consider the case of Cyprus in March 2013, when certain bank deposits were forcibly converted into bank stock after an earlier scheme to confiscate the deposits by taxation was rejected. This conversion of deposits to equity in order to bail out insolvent banks was looked upon favorably in Europe and the United States as a template for future bank crisis management. There are innumerable ways to earn a return by taking risk. Stocks, bonds, real estate, hedge funds, and many other types of pooled vehicles are all investments that include both risk and return. An entire branch of economic science, particularly options pricing theory, was based on the flawed assumption that a short-term Treasury bill is a “risk-free” investment. In fact, recent U.S. credit downgrades below the AAA level, a rising U.S. debt-to-GDP ratio, and continuing congressional dysfunction about debt-ceiling legislation have all shown the “risk-free” label to be a myth.


pages: 545 words: 137,789

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

"Robert Solow", 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, Blythe Masters, Bretton Woods, British Empire, business cycle, capital asset pricing model, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, corporate raider, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, different worldview, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, George Akerlof, global supply chain, Gunnar Myrdal, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, Kickstarter, laissez-faire capitalism, Landlord’s Game, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, Naomi Klein, negative equity, Network effects, Nick Leeson, Northern Rock, paradox of thrift, Pareto efficiency, Paul Samuelson, 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, Vilfredo Pareto, wealth creators, zero-sum game

However, in protecting Bear’s creditors from any losses, the authorities had undoubtedly prevented other Wall Street firms, and their shareholders, from incurring big losses. Economically, this government intervention was perfectly justifiable. With the credit markets having been locked up for more than half a year, it was silly to go on pretending that this was simply a liquidity crisis. It had evolved into a full-blown banking crisis. The collapse in the value of subprime securities and other asset-backed securities had permanently wiped out hundreds of billions of dollars of bank capital. There was a growing suspicion that some major financial institutions were insolvent, or close to insolvent. History demonstrates that in such circumstances the only way for policymakers to get ahead of the problem is to acknowledge its scale, excise some of the bad debts, and recapitalize the banks deemed able to survive.

History demonstrates that in such circumstances the only way for policymakers to get ahead of the problem is to acknowledge its scale, excise some of the bad debts, and recapitalize the banks deemed able to survive. In Japan during the 1990s, this didn’t happen, and the country endured a decade of economic stagnation following the bursting of a stock and real estate bubble. At about the same time, in Scandinavia, by contrast, governments took quick and effective action to resolve a large-scale banking crisis. In Finland, the government combined more than forty savings banks into one state-owned savings bank; in Norway, the government nationalized the country’s three biggest banks, wiping out their shareholders; in Sweden, the government seized control of the two largest banks and shunted their toxic assets into a state-owned company. In a March 2008 column, I quoted a speech by Stefan Ingves, a senior official at the International Monetary Fund, who, as an official in the Swedish government, had helped to devise its policies.

If these gambles work out well, their employees and stockholders reap the rewards; if things go wrong, the taxpayers foot some of the bill. To offset these perverse incentives, regulators should impose maximum leverage ratios on banks and other financial firms, and they should also oblige them to hold more than adequate levels of liquidity and capital in reserve. In addition, banks must be prevented from hiding liabilities and risks in SIVs and other shell companies. From the fringe banking crisis of the 1970s to the collapse of the shadow banking system in 2007, recent history demonstrates that opacity is a recipe for trouble. The big financial institutions will squawk about these restrictions, which will reduce their profitability. Let them. In choosing to shelter under the government safety net, they have abrogated their right to behave like hedge funds. On the subject of hedge funds and other nonbanks, we now know that the labels attached to financial institutions are often misleading.


pages: 537 words: 144,318

The Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money by Steven Drobny

Albert Einstein, Asian financial crisis, asset allocation, asset-backed security, backtesting, banking crisis, Bernie Madoff, Black Swan, Bretton Woods, BRICs, British Empire, business cycle, business process, buy and hold, capital asset pricing model, capital controls, central bank independence, collateralized debt obligation, commoditize, Commodity Super-Cycle, commodity trading advisor, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, diversification, diversified portfolio, equity premium, family office, fiat currency, fixed income, follow your passion, full employment, George Santayana, Hyman Minsky, implied volatility, index fund, inflation targeting, interest rate swap, inventory management, invisible hand, Kickstarter, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, market microstructure, moral hazard, Myron Scholes, North Sea oil, open economy, peak oil, pension reform, Ponzi scheme, prediction markets, price discovery process, price stability, private sector deleveraging, profit motive, purchasing power parity, quantitative easing, random walk, reserve currency, risk tolerance, risk-adjusted returns, risk/return, savings glut, selection bias, Sharpe ratio, short selling, sovereign wealth fund, special drawing rights, statistical arbitrage, stochastic volatility, stocks for the long run, stocks for the long term, survivorship bias, The Great Moderation, Thomas Bayes, time value of money, too big to fail, transaction costs, unbiased observer, value at risk, Vanguard fund, yield curve, zero-sum game

So when you say fiscal policy is often underestimated or underappreciated, you are not just speaking about the U.S.? No, it is everywhere. Again, China is a great example. Their stimulus was largely fiscal; monetary policy was relatively passive through all this. China did not cut rates aggressively, nor did they have to bail out the banking system all at once. They never faced a potential domino effect of failing banks. The same is true for much of non-Japan Asia. Countries that did not face a banking crisis did not have the same type of monetary policy response. Aggressive monetary stimulus generally occurred in the debtor countries, such as the U.S. and UK. In the euro region, monetary policy stimulus occurred mainly because Spain, Ireland, and several Eastern European debtor countries were in deep trouble. And while Switzerland is a creditor country, they needed an easier monetary policy mainly because they have a finance-based economy and their banks were in trouble as well.

Nevertheless, I try to stay at least twice as paranoid as the market. There are many trades that others deem great opportunities—but I will not engage in them because they have negative skew risk, meaning they can become illiquid very quickly. For example, the potential for a liquidity crisis in 2008 was well flagged. In August 2007, when LIBOR spiked, it was clear that we were in a systemic banking crisis. It was also obvious that the leverage would have to unwind, which would trigger a liquidity problem causing more unwinding. A full year later, however, people were still in denial that balance sheets were overleveraged and that banks were in trouble. (See Figure 5.4.) Figure 5.4 Three-Month LIBOR—Overnight Indexed Swap (OIS) Spreads, 2006-2008 SOURCE: Bloomberg. When people saw LIBOR spike in the summer of 2007, what should they have done to mitigate their illiquidity risk?

See Risk premia payment Price/earnings (P/E) multiples, exchange rate valuation (relationship) Primary Dealer Credit Facility, placement Prime broker risk Princeton University (endowment) Private equity cash flow production tax shield/operational efficiency arguments Private sector debt, presence Private-to-public sector risk Probability, Bayesian interpretation Professor, The bubble predication capital loss, avoidance capital management cataclysms, analysis crowding factor process diversification efficient markets, disbelief fiat money, cessation global macro fund manager hedge fund space historical events, examination idea generation inflation/deflation debate interview investment process lessons LIBOR futures ownership liquidity conditions, change importance market entry money management, quality opportunities personal background, importance portfolio construction management positioning process real macro success, personality traits/characteristics (usage) returns, generation risk aversion rules risk management process setback stocks, purchase stop losses time horizon Titanic scenario threshold trades attractiveness, measurement process expression, options (usage) personal capital, usage quality unlevered portfolio Property/asset boom Prop shop trading, preference Prop trader, hedge fund manager (contrast) Protectionism danger hedge process Public college football coach salary, public pension manager salary (contrast) Public debt, problems Public pensions average wages to returns endowments impact Q ratio (Tobin) Qualitative screening, importance Quantitative easing (QE) impact usage Quantitative filtering Random walk, investment Real annual return Real assets Commodity Hedger perspective equity-like exposure Real estate, spread trade Real interest rates, increase (1931) Real macro involvement success, personality traits/characteristics (usage) Real money beta-plus domination denotation evolution flaws hedge funds, differentiation impacts, protection importance investors commodity exposure diversification, impact macro principles management, change weaknesses Real money accounts importance long-only investment focus losses (2008) Real money funds Commodity Hedger operation Equity Trader management flexibility frontier, efficiency illiquid asset avoidance importance leverage example usage management managerial reserve optimal portfolio construction failure portfolio management problems size Real money managers Commodity Investor scenario liquidity, importance long-term investor misguidance poor performance, usage (excuse) portfolio construction valuation approach, usage Real money portfolios downside volatility, mitigation leverage, amount management flaws Rear view mirror investment process Redemptions absence problems Reflexivity Rehypothecation Reichsmarks, foreign holders (1922-1923) Relative performance, inadequacy Reminiscences of a Stock Operator (Lefèvre) Renminbi (2005-2009) Repossession property levels Republic of Turkey examination investment rates+equities (1999-2000) Reserve currency, question Resource nationalism Returns forecast generation maximization momentum models targets, replacement Return-to-worst-drawdown, ratios (improvement) Reward-to-variability ratio Riksbank (Sweden) Risk amount, decision aversion rules capital, reduction collars function positive convexity framework, transition function global macro manager approach increase, leverage (usage) measurement techniques, importance parameters Pensioner management pricing reduction system, necessity Risk-adjusted return targets, usage Risk assets, decrease Risk-free arbitrage opportunities Risk management Commodity Hedger process example game importance learning lessons portfolio level process P&L, impact tactic techniques, importance Risk premia annualization earning level, decrease specification Risk/reward trades Risk-versus-return, Pensioner approach Risk-versus-reward characteristics opportunities Roll yield R-squared (correlation) Russia crisis Russia Index (RTSI$) (1995-2002) Russia problems Savings ratio, increase Scholes, Myron Sector risk, limits Securities, legal lists Self-reinforcing cycles (Soros) Sentiment prediction swings Seven Sisters Sharpe ratio increase return/risk Short-dated assets Short selling, ban Siegel’s Paradox example Single point volatility 60-40 equity-bond policy portfolio 60-40 model 60-40 portfolio standardization Smither, Andrew Socialism, Equity Trader concern Society, functioning public funds, impact real money funds, impact Softbank (2006) Soros, George self-reinforcing cycles success Sovereign wealth fund Equity Trader operation operation Soybeans (1970-2009) Special drawing rights (SDR) Spot price, forward price (contrast) Spot shortages/outages, impact Standard deviation (volatility) Standard & Poor’s 500 (S&P500) (2009) decrease Index (1986-1995) Index (2000-2009) Index (2008) shorting U.S. government bonds, performance (contrast) Standard & Poor’s (S&P) shorts, coverage Stanford University (endowment) State pension fund Equity Trader operation operation Stochastic volatility Stock index total returns (1974-2009) Stock market increase, Predator nervousness Stocks hedge funds, contrast holders, understanding pickers, equity index futures usage shorting/ownership, contrast Stops, setting Stress tests, conducting Subprime Index (2007-2009) Sunnies, bidding Super Major Survivorship bias Sweden AP pension funds government bond market Swensen, David equity-centric portfolio Swiss National Bank (SNB) independence Systemic banking crisis Tactical asset allocation function models, usage Tactical expertise Tail hedging, impact Tail risk Take-private LBO Taleb, Nassim Tax cut sunset provisions Taxes, hedge Ten-year U.S. government bonds (2008-2009) Theta, limits Thundering Herd (Merrill Lynch) Time horizons decrease defining determination shortening Titanic funnel, usage Titanic loss number Titanic scenario threshold Topix Index (1969-2000) Top-line inflation Total credit market, GDP percentage Total dependency ratio Trade ideas experience/awareness, impact generation process importance origination Traders ability Bond Trader hiring characteristics success, personality characteristics Trades attractiveness, measurement process hurdle money makers, percentage one-year time horizon selection, Commodity Super Cycle (impact) time horizon, defining Trading decisions, policy makers (impact) floor knowledge noise level ideas, origination Tragedy of the commons Transparency International, Corruption Perceptions Index Treasury Inflation-Protected Securities (TIPS) trade Triangulated conviction Troubled Asset Relief Program (TARP) Turkey economy inflation/equities (1990-2009) investment rates+equities (1999-2000) stock market index (ISE 100) Unconventional Success (Swensen) Underperformance, impact Undervaluation zones, examination United Kingdom (UK), two-year UK swap rates (2008) United States bonds pricing debt (1991-2008) debt (2000-2008) home prices (2000-2009) hyperinflation listed equities, asset investment long bonds, market pricing savings, increase stocks tax policy (1922-1936) trade deficit, narrowing yield curves (2004-2006) University endowments losses impact unlevered portfolio U.S.


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Meltdown: How Greed and Corruption Shattered Our Financial System and How We Can Recover by Katrina Vanden Heuvel, William Greider

Asian financial crisis, banking crisis, Bretton Woods, business cycle, buy and hold, capital controls, carried interest, central bank independence, centre right, collateralized debt obligation, conceptual framework, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, declining real wages, deindustrialization, Exxon Valdez, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, full employment, housing crisis, Howard Zinn, Hyman Minsky, income inequality, information asymmetry, John Meriwether, kremlinology, Long Term Capital Management, margin call, market bubble, market fundamentalism, McMansion, money market fund, mortgage debt, Naomi Klein, new economy, offshore financial centre, payday loans, pets.com, plutocrats, Plutocrats, Ponzi scheme, price stability, pushing on a string, race to the bottom, Ralph Nader, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, sovereign wealth fund, structural adjustment programs, The Great Moderation, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, wage slave, Washington Consensus, women in the workforce, working poor, Y2K

Massive losses piled up at places like Citigroup, Coun-trywide, Merrill Lynch and Morgan Stanley, and cascaded back into the insurance companies. At the end of February, the huge insurer American International Group reported the largest quarterly loss, $5 billion, since the company started in 1919. After some delay, the Federal Reserve Board last summer started lowering interest rates on loans to the banks. But in a phrase from the bank crisis of the 1930s, it was like “pushing on a string.” The bankers’ problem was not that money was too expensive to lend out; it was that they were afraid they wouldn’t get their money back. When they did lend, they jacked up the rates to compensate for the higher perceived risks—even to solid customers. The Port Authority of New York and New Jersey suddenly had to borrow money at 20 percent. The State of Pennsylvania couldn’t finance its college student loan program.

Most important, it drew upon the New Deal’s legacy of government intervention in the marketplace—without any of the New Deal’s fundamental concern for the well-being of ordinary Americans. This year happens to be the 75th anniversary of the New Deal, a revolution in governmental philosophy that began with the Emergency Banking Act of 1933. That first piece of New Deal legislation was a hurried response to the worst banking crisis in U.S. history—until now. President Franklin Delano Roosevelt outlined the problem clearly in his first fireside chat, a week after taking office. “We had a bad banking situation,” Roosevelt said. “Some of our bankers had shown themselves either incompetent or dishonest in the handling of people’s funds. They had used the money entrusted to them in speculations and unwise loans. ... It was the government’s job to straighten out this situation and do it as quickly as possible.”


pages: 310 words: 82,592

Never Split the Difference: Negotiating as if Your Life Depended on It by Chris Voss, Tahl Raz

banking crisis, Black Swan, clean water, cognitive bias, Daniel Kahneman / Amos Tversky, Donald Trump, framing effect, friendly fire, iterative process, loss aversion, market fundamentalism, price anchoring, telemarketer, ultimatum game, uranium enrichment

But then the Dutch explorer Willem de Vlamingh went to western Australia in 1697—and saw a black swan. Suddenly the unthinkable and unthought was real. People had always predicted that the next swan they saw would be white, but the discovery of black swans shattered this worldview. Black Swans are just a metaphor, of course. Think of Pearl Harbor, the rise of the Internet, 9/11, and the recent banking crisis. None of the events above was predicted—yet on reflection, the markers were all there. It’s just that people weren’t paying attention. As Taleb uses the term, the Black Swan symbolizes the uselessness of predictions based on previous experience. Black Swans are events or pieces of knowledge that sit outside our regular expectations and therefore cannot be predicted. This is a crucial concept in negotiation.

Here are some of the best techniques for flushing out the Black Swans—and exploiting them. Remember, your counterpart might not even know how important the information is, or even that they shouldn’t reveal it. So keep pushing, probing, and gathering information. ■Let what you know—your known knowns—guide you but not blind you. Every case is new, so remain flexible and adaptable. Remember the Griffin bank crisis: no hostage-taker had killed a hostage on deadline, until he did. ■Black Swans are leverage multipliers. Remember the three types of leverage: positive (the ability to give someone what they want); negative (the ability to hurt someone); and normative (using your counterpart’s norms to bring them around). ■Work to understand the other side’s “religion.” Digging into worldviews inherently implies moving beyond the negotiating table and into the life, emotional and otherwise, of your counterpart.


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A Swamp Full of Dollars: Pipelines and Paramilitaries at Nigeria's Oil Frontier by Michael Peel

banking crisis, British Empire, colonial rule, energy security, informal economy, Kickstarter, megacity, offshore financial centre, plutocrats, Plutocrats, race to the bottom, Scramble for Africa, trade route, UNCLOS, wage slave

It’s a spirit that’s less alien than it might first appear to the rich Western states that consume Nigerian oil and thus help finance Lagosian anarchy. As we’ve seen, it only takes a sharp rise in food costs or a crisis in the financial markets to remind even the most complacent Englishman in his castle uncomfortably of the possibility of sudden poverty and social unrest. The anxiety in Britain at the height of the banking crisis in late 2008 hinted at how a stability stemming from seven centuries of parliamentary tradition could disappear 76 A SWAMP FULL OF DOLLARS with surprising speed in the wake of economic catastrophe, extreme violence or environmental disaster. Perhaps a latent recognition of this underpins the popularity among Western audiences of Cormac McCarthy’s The Road, whose post-apocalyptic ambience surpasses that even of Lagos at its most dystopian.

G. 43 Balewa, Sir Tafawa 43, 50 Balogun, Tafa 177 Bari, Daniel Orumiegha- 165 Bayelsa State 8, 23, 31, 106, 108, 110, 183 Alamieyeseigha, DSP, governor 105–13, 132–3, 189, 201 Poverty Eradication Committee 108 Bealer, Jay 141 Benn, Hilary 170 Benue River 5–6 Benue State 8 Biafra, see civil war Bill and Melinda Gates Foundation 81 bin Laden, Osama 9 Black Faces, White Masks 191 Blair, Tony 122 Bonga oilfield 142 Bongo, Omar 150, 151 Bonny Island 27, 145 Bookshop House 68, 70 BP 23, 41 Anglo-Iranian Oil Company 41 Brass 32, 34–5, 38, 39, 44–5, 107 British cemetery 44–5 Charles, Charles 45 Chatteris, Henry Byrne 45 HMS St George 45 Sutton, William 45 Taylor, George John 45 Briggs, Boma 18 Britain Aberdare, Lord 40 banking crisis 75 Blair, Tony 122 British oil 31 Brown, Gordon 122, 143 Chamberlain, Joseph 40 Churchill, Winston 41, 49, 90 civil war, involvement in 47–58 civil war, UK involvement in 48–61 colonial relationship with Nigeria xvi, 24, 31, 32, 35, 38, 40, 41, 42, 76–7, 169 Elizabeth II, Queen 201–202 INDEXAND JUNKIES STARK ILLITERATES Financial Services Authority 122, 131 Goldie, Sir George 36–7, 40 Grey, Sir Ralph 42 Hunt, Sir David 56–7 Kirk, Sir John 38–9 Macmillan, Harold 31 Oil Rivers Protectorate 36 post-independence relationship with Nigeria xvii, 48, 50, 57, 60 Royal Niger Company 32, 33–4, 35, 36–40, 191, 199 Stewart, Michael 54, 55 Straw, Jack 17, 201 Thatcher, Margaret 74, 116 Thomas, George 54 Thomas, Sir Philip 201 Unilever 33 United Africa Company 33, 34, 36 Wilson, Harold 48, 50, 51, 54 Brown, Gordon 122, 143 Buhari, Muhammadu 17 buses, Lagos 71, 96–103 Chiguzor 97–103 Lagos State Traffic Management Authority (‘MOT’) 99, 100 National Union of Road Transport Workers 70–71, 98–100, 101 Obalende terminus 100, 103 Bush, George W. 149 Cape Verde islands 147, 153 Chamberlain, Joseph 40 Chang, Clifton 155 Chelsea Hotel, Abuja 132–3 Chevron xvi, 6, 166, 186–8 Chiguzor 97–103 213 China in Cape Verde 153 expansion in Africa 139, 140, 146, 153–4, 168, 169, 203 exploration contracts xvii–xviii Dangote Group 153, 203 Sinoma International Engineering 154 Churchill, Winston 41, 49, 90 Citibank 124–5 civil war (1967–70) 44, 47–59 death toll in 52 Gowon, General Yakuba 51, 58 Hunt, Sir David 56–7 Ironsi, Major-General Johnson Umunnakwe Aguiyi- 50–51 January Boys 50 Ojukwu, General Chukwuemeka 47–58, 181 Shell 48, 52, 54–5 Stewart, Michael 54 Thomas, George 54 Wilson, Harold 48, 50, 51, 54 Clifford, Reuben Wilson 189–90, 191 Community Primary School One 171–2 Comrade 180–83, 186, 193 Congo 82 corruption xvi, xvii, 18, 59, 90, 103, 105, 114–15, 158, 161, 167, 171, 177, 202–203 ‘area boys’ urban gangs 67–73, 92 Balogun, Tafa 177 banks 106, 109–13, 115–132 Citibank 124–5 UBS 110–12 214 A SWAMP FULL OF DOLLARS Economic and Financial Crimes Commission (EFCC) 109, 112, 113, 114, 177, 202 Ribadu, Nuhu 202–203 electoral 10, 16–17, 50, 107–108, 204 international 145–6 Transparency International 146 transport system 103, 109 Crowder, Michael 40–41 Curtis, Richard 171 Dangote Group 153 Sinoma International Engineering 154 Dariye, Joshua 113 Daukoru, Edmund 203 Daura, Ahmadu 123 debt crisis, see foreign debt, Nigerian Dechaine, Lieutenant-Colonel Rene 140, 152 Delta State 113 Dutch 35 Dada, Timothy 95–6 Dallas, Alexander 152 Dallas 137 Bealer, Jay 141 Chang, Clifton 155 Esono, Pablo 141 Florio, Lieutenant Frank 150 Hendrickson, Commander Bob 141, 148, 149 Hollister, Jay 144 Jones, Ansel 137–8 Kaichi Maru 144 Kurta, Rear Admiral Anthony 140 Montalvo, Lieutenant Frank 151 Nowell, Commodore John 140, 150 Nzang, Lieutenant Placido 141, 155 Tiny, Jimmy 143 UN Convention on the Law of the Sea 144 Wagner, Captain 143, 144, 145, 148, 149, 152 Dangosu, Giedia 24 Dangote, Aliko 203 Economic and Financial Crimes Commission (EFCC) 109, 112, 113, 114, 177, 202 economic collapse see foreign debt, Nigerian Egbesu 5, 13, 183, 191, 192, 198 Ekwueme, Alex 59, 61–4 Elf 151 Elizabeth II, Queen 201–202 Emmanuel, Henry 193–4 Energy Information Administration, US 6, 145 Eni 6, 29, 146 Enron 146 Enugu 47 Equatorial Guinea 141, 142 Mbasago, President Obiang Nguema 141 Ernest 182 Esono, Pablo 141 European Union xviii ExxonMobil xvi, 6, 159 Eze, Kenneth 84–7 Fanon, Franz 191 50 Cent 81 INDEXAND JUNKIES STARK ILLITERATES financial crisis, international 75, 145, 150, 168 Florio, Lieutenant Frank 150 foreign debt, Nigerian 5 8–64, 122, 160, 171 Africa Economic Digest 60, 63 Ekwueme, Alex 59, 61–4 Paris Club 61, 64, 171 Synge, Richard 60, 63, 209 Wolfensohn, James (World Bank) 63 France relationship with Nigeria 36, 59 Freeman, Commander Timi 184–98 Friedman, Thomas 141 G8 summit (2005) 170, 171 Gabon 118, 150 Bongo, Omar 150, 151 Dechaine, Lieutenant-Colonel Rene 140, 152 Gana, Peter 120 Port-Gentil 150, 152 Gazprom xviii Gbomo, Jomo 180 Germans 10 Ghana 43, 51, 60–61, 76, 118 Accra 44 Nkrumah, Kwame 43 Godson 184–98 ‘Golden Arches’ theory 141 Goldie, Sir George 36–7, 40 The Good, the Bad and the Ugly 21 Gowon, General Yakuba 51, 58 Grey, Sir Ralph 42–3 Grimu, Richard 33 Gulf of Guinea xiii, 138, 141, 145, 147, 154 215 Gusau, General Mohammed Aliyu 119 Halliburton 145–6 Stanley, Jack 145–6 Hendrickson, Commander Bob 141, 148, 149 HMS St George 45 Hobbes, Thomas 75, 86 Hollister, Jay 144 ‘Horatius’, poem 53 Hunt, Sir David 56–7 Iblubor, Blessing 16 Ibori, James 113–14, 202 MER Engineering 114 Icelanders 10 Igbo people 41, 47, 49, 50, 51 civil war and Biafra 47–9 Ijaw people 5, 7, 8, 18, 19, 21, 108, 161, 164, 181, 183, 186, 198 Ikebiri I 185–7, 189 Ododo, Francis 185–7 independence, Nigerian 43, 44, 169 Inengite, Chief Osobere 24–7, 29, 170 Inengite, Clifford 29–30 Integrate Production System Surveillance (IPSS) 162 International Maritime Bureau 142 Ironsi, Major-General Johnson Umunnakwe Aguiyi- 50–51 Islam al-Qaeda 9 bin Laden, Osama 9 in Nigeria 9, 41 Itsekiri people 164 Iweala, Ngozi Okonjo- 74, 158 216 A SWAMP FULL OF DOLLARS Izon language 30, 33 Jaja, Tamunosisi Gogo 172–4 January Boys 50 Jones, Ansel 137–8 Joseph, Colin 109 Kaichi Maru 144 Kalabar River 3 Kirk, Sir John 38–9 KKK 10 Korokorose 185, 192–7 Kuluama I 188–92 Clifford, Reuben Wilson 189–90, 191 Community Development Council 189 Orumo, Emmanuel 189 Kunle 179, 182 Kuramo Beach 80–87 Bala 83 Bullet 83 Dreams bar 84 Eze, Kenneth 84–7 Le Meridien Eko hotel 80, 81 Queen 83 Sammy’s Bar 80 Scorpion 81–4 Varieties Bar 81, 82 Kurta, Rear Admiral Anthony 140 Lagos xvi, xviii, xix, xx, 36, 67, 73–80 Balogun market 69 Bookshop House 68, 70 Broad Street 70 buses 71, 96–103 Campos Square 70, 73 Ikeja district 93 Kuramo Beach 80–87 Odunlami Street 68 okadas 89–96, 205 Orile 102 Osodi 99, 100, 103 Somolu 90 Third Mainland Bridge 78, 100 transport system 90–103, 205 Victoria Island 77, 80, 205–206 Lagos State Traffic Management Authority (‘MOT’) 99, 100 Leviathan 75 Liberia 9, 14, 70, 79, 172, 188, 197 life expectancy of Nigerians 73 Live 8 60, 171 Macaulay, Herbert 67 Macaulay, Thomas Babington 53 Macbeth 15 Macmillan, Harold 31 Mann, Simon 142 Marathon 143 Martins 181 Mathews, Michael 124 Mbasago, President Obiang Nguema 141 McCarthy, Cormac 76 McKenzie, Glenn 180–99, 210 MEND, see Movement for the Emancipation of the Niger Delta Middle East 6 concerns about disruption in xviii, 9, 139, 203 elections 17 Saudi Arabia oil exports 6 minibuses 71 Miss World contest (2002) xix Mistry, Rohinton 206 Mobile Police 184 INDEXAND JUNKIES STARK ILLITERATES Molue see buses, Lagos Monfrini, Enrico 115, 117–30 Gusau, General Mohammed Aliyu 119 Swiss Federal Office of Justice 126 Montalvo, Lieutenant Frank 151 Montero, Kaizer xiv–xv, xx Morgan Procurement 124 MOSEND see Movement for the Survival of the Ethnic Nationalities in the Niger Delta Motorcycle Operators Association of Lagos State 90–94 Adio, Innocent 95 Agumba, Leonard 94–5 Dada, Timothy 95–6 Gbagada branch 94 Orimogunje, Olufemi 91–4 Movement for the Emancipation of the Niger Delta (MEND) 21, 22, 163, 179–99 Freeman, Commander Timi 184–98 Gbomo, Jomo 180 Olotu 197–9 Movement for the Survival of the Ethnic Nationalities in the Niger Delta (MOSEND) 181 National Archives 35, 37, 42, 43, 54 National Intelligence Council, US xvii National Oil Spill Detection and Response Agency 27–8 National Petroleum Corporation xviii 217 National Union of Road Transport Workers 70–71, 98–100, 101 Ndibe, Okey 79 Niger Delta xiii, 3–22, 23–45 background and people 5–6 Benue River 5–6 disruption and militancy in 3–22, 7, 8, 10 history of oil discovery in 23–45 housing 25 Niger Delta People’s Volunteer Force 3, 187 Niger River 5–6, 36 village life in xvii, 18, 28–9, 189–92, 195–7 Niger Delta People’s Volunteer Force 3, 187 Niger River 5–6, 36 Nigeria, civil war see civil war Nigeria, creation of as new country 41, 42 Lugard, Flora 41 Nigeria, foreign debt see foreign debt, Nigerian Nigeria, independence see independence, Nigerian Nigeria, religion see religion Nigerian Family Support Programme 124 Nigerian National Petroleum Corporation 125, 183 Nitel 126 Nkrumah, Kwame 43 Nowell, Commodore John 140, 150 Nyingife, Sunday 29, 30 Nzang, Lieutenant Placido 141, 155 218 A SWAMP FULL OF DOLLARS Obasanjo, Olusegun (president of Nigeria 1999–2007) 8, 16, 17, 19, 24, 62, 63, 114, 116, 129, 146, 155, 158, 176, 186 1978 Land Use Act 9, 186 Odi 8 Odili, Peter 10, 172–6 Odioma 165 Bari, Daniel Orumiegha- 165 Ododo, Francis 185–7 Odugbemi, Sina 90–103 Ogoni 7, 161 oil export levels xvii, 6, 7, 27, 52, 58, 145 spills xv, 27–8 stealing of xvi, 13, 15, 17–19, 143, 143, 168, 171 world prices xvi, xvii, 19, 58, 60, 90, 109, 139, 145, 154, 160, 167–8, 203 oil companies Agip 192, 195 BP 23, 41 Anglo-Iranian Oil Company 41 Chevron xvi, 6, 166, 186–8 Elf 151 Eni 6, 29, 146 ExxonMobil xvi, 6, 159 Shell xv, xvi, 6, 7, 15, 18, 23, 28, 41, 42, 146, 157–70, 198 Bonga oilfield 142 in Oloibiri 25–9 interest in civil war 48, 52, 54–5 London office 157–70 Omiyi, Basil 157–70, 198 Total 6, 29, 146 Oil Rivers Protectorate 36 oil spills xv, 27–8 National Oil Spill Detection and Response Agency 27–8 Ojukwu, General Chukwuemeka 47–58, 181 okadas 89–96, 205 Adio, Innocent 95 Agumba, Leonard 94–5 Dada, Timothy 95–6 Orimogunje, Olufemi 91–4 Palm Grove Unit, Motorcycle Operators Association of Lagos State 90–94 riots, Ikeja district 93 Oko 61 Oloibiri 23–7, 170, 181 Inengite, Chief Osobere 24–7, 29, 170 Inengite, Clifford 29–30 Nyingife, Sunday 29, 30 Oloibiri Oil and Gas Research Institute 24 Shell in 25–9 Oloibiri Oil and Gas Research Institute 24 Olotu 197–9 ‘Operation Fire for Fire’ 161 Operation Locust Feast 19 Oputa, Charly Boy 89, 90, 94 Organisation for Economic Co-operation and Development (OECD) 146 Orimogunje, Olufemi 91–4 Orumo, Emmanuel 189 palm oil xvi, 32, 34, 32, 37 1895 Akassa uprising 32–5, 38–9, 107 Paris Club 61, 64, 171 Paul, A.A. 195 INDEXAND JUNKIES STARK ILLITERATES Pax Christi 163 People’s Democratic Party 30, 107, 172, 202 Odili, Peter 172–6 piracy 142–3, 144–5 Sirius Star 142 UN Convention on the Law of the Sea 144 Plateau State 113 police 21, 161–2 Balogun, Tafa 177 Mobile Police 184 ‘Operation Fire for Fire’ 161 Supernumerary (Spy) police 162 Port Harcourt 3, 4, 13, 17, 20, 23, 51, 52, 162, 167, 175, 176, 179, 180, 202 Port-Gentil, Gabon 150, 152 Portuguese 35, 76 Poverty Eradication Committee, Bayelsa State 108 Powell, Colin xix The Prize: The Epic Quest for Oil, Money and Power 151 religion 9, 41, 71, 102 Ribadu, Nuhu 202–203 Rivers State 17, 171–6 budget 174–6 Community Primary School One 171–2 Government House 173, 174–6 Jaja, Tamunosisi Gogo 172–4, 175 Odili, Peter 172–6 State Assembly building 173 The Road 76 Royal Dutch Shell see Shell Royal Niger Company 32, 33–4, 35, 36–40, 191, 199 219 Unilever 33 United Africa Company 33, 34, 36 Wallace, William 38 Russell, Henry 34 Russia Gazprom xviii Georgia conflict 150 oil exports 6 relationship with Nigeria xviii, 139, 146, 168, 203 Sagbama 107 Salisbury, Marquess of 38, 40 Sangama 18 São Tomé and Príncipe xiii–xx, 139–42 agua petróleo xiii–xv, xvi, xx, 139 Saro-Wiwa, Ken 7, 8, 22, 158, 161 Scorpion 81–4 Second World War 42 September 2001 terrorist attacks xviii, 161, 203 Shad-Ro Services 162 Shagari, Shehu 59 Shell xv, xvi, 6, 7, 15, 18, 23, 28, 41, 42, 146, 157–70, 198 in Oloibiri 25–9 interest in civil war 48, 52, 54–5 Bonga oilfield 142 London office 157–70 Omiyi, Basil 157–70, 198 Siemens 126 Simeon 183–99 Sirius Star 142 slavery 32, 35–6, 40, 76, 153 Smith, M.


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Them And Us: Politics, Gree