1819, 1837, 1857, 1873, 1884, 1893, 1907: Major bank collapses

                        1920s:  even in the 1920s -- hundreds of bank failures every year;

            - Periods of time with Very High Number of failures:

1931-40 Great Depression following Stock Market Bubble 1920s;

1984-1993 Deregulation of S&L’s following inflation 1979-83;

2008-2011 (today) Deregulation 1999 & Housing Bubble 2002-2007

 

*Recent Costly Banking Failure: The 1980s S&L Banking Crisis

-Financial innovation and new financial instruments increased risk taking

-Increased deposit insurance led to increased moral hazard

-Deregulation

--Depository Institutions Deregulation and Monetary Control Act of 1980; allowed more ‘free market’ activity to occur.

--Depository Institutions Act of 1982; more freedom for S&L actions

 

The Financial Institutions Reform, Recovery, and Enforcement Act of 1989: New laws in Response to major crisis of S&L banks of the 1980s:

-Financial Institutions Reform, Regulatory and Enforcement Act of 1989

-Federal Deposit Insurance Corporation and Improvement Act of 1991

--Cost of the bailout approximately $150 billion, or 3% of GDP

--{Compare Table of Costs/GDP for various countries banking crises where costs range from >50% and less for 1980-2005;

--{US Crisis of 2008 uncertain figures but Gross Costs >20% GDP while Net Costs will take years to calculate, but certainly less)}

 

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Banking Crises Throughout the World

-“Déjà vu all over again” {Translation = ‘Is the same thing—financial crisis after financial crisis—happening repeatedly?}

--Deposit insurance is not to blame for some of these banking crises

--The common feature of these crises is the existence of a government safety net, where the government stands ready to bail out troubled financial institutions.

            -{See chart/table 2 of countries bank crises, costs/GDP; 1980-2005}

            -{See map (Fig.2) of countries affected by financial/banking crises.} and, ASK why isn’t the USAalso red? (A systemic crisis in 2008 or not?)}

 

 

*Short Case Studies of Banking/Financial Crises in Other (non-USA) Countries:

 

=Scandinavia {1980s deregulation; real estate lending bubble; bubble bursting late 1980s and government bailouts/takeovers-nationalizations and resale to private owners}

            --Sweden (early 1990s):  Bank crisis; nationalization and then reprivatization strategy

 

=Latin America (early 1980s; late 1980s/early 1990s; 2001)  {1980s liberalization; deregulation; privatization of state banks; excessive risky lending; real estate lending; bubbles & bursting; bail-outs;  Argentina a special case of public indebtedness and currency board (fixed dollar basis for domestic currency) and general default in 2001 of public debt).}

 

=Russia and Eastern Europe {post-1991 and post-1989, respectively}

            ---Eastern Europe: 1990-1996; 2008+ {privatization or permitting state banks to be run by self-interested management; bad loans; corruption; capital flight; bank crises and bailouts}

            --Russia (1992; 1995; 1998; 2008+) (autonomization of state banks; self-interested parties used banks as private cashboxes; first private banks created; inexperience and/or corrupt practices by many bank managements; bad loans, capital flight; bank panic of 1995; and fallout of bank speculative borrowing abroad in foreign currencies to speculate in higher local/domestic rates came to crisis when foreign exchange value of Ruble collapsed in 1998 causing widespread bank failures and led to Government bailouts for some while others cause large losses among depositors)

 

=Japan (1990s)

            --Deregulation of financial markets in the 1980s under strong pressure from the USA (for ‘liberalization’);  massive real estate lending boom led to real estate bubble (special mortgage companies taking huge risks); lack of strict oversight; Bubble bursting by early 1990s; large scale bank failures; Government permitted fake valuation of assets for several years to prevent widespread bankruptcies, but stagnation of real economy meant that the financial and real sectors were not helping in economic growth;  restructuring of late 1990s but still relatively stagnant real economy growth rates…still recovering.

 

=China (1990s and 2000s)

            --Chinese economy still dominated by 4 national state-owned banks that have made massive lending for real economy development their priority;  many loans are ‘non-performing’ (i.e. not being repaid according to loan agreements); successive restructurings;  development of gray market (private, quasi-legal or illegal lending by shadowy figures) even currently;  uncertainty about details of Chinese system due to radical decentralization (to provincial level) of fiscal and welfare, educational, and health system;  Bubble in real estate heavily funded by loans and richer citizens; recent deflation of the bubble (2011) indicates potential problems but very centralized money/banking system means the Party dominates all decisions.

 

=East Asia (1997)

            --Deregulation, liberalization of finance and companies; some privatization of state monopolies; Inflows of large scale of foreign capital in 1990s promoting bubbles in real estate and stock markets; bubble bursting in 1997 beginning with Philippines, and spreading to Thailand and other countries and contagion later leading to Brazilian (and later Argentina) and Russian crises of 1998. 

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*NEW PUBLIC POLICIES NEEDED? 

STRONGER Financial REGULATIONS—PREVENTING FUTURE Financial CRISES

-Regulation should focus on limiting the agency problems created by the “originate-to-distribute” business model—reduce conflicts of interest

-Increased regulation of mortgage brokers

--Tighten licensing requirements

--Require to disclose information

-Fewer subprime mortgage products (no high risk borrowers)

-Regulation of compensation of CEO & other Management

-Higher capital requirements

-Additional regulation of privately owned government sponsored enterprises:

--Fully privatize them

--Completely nationalize them

--Leave them privately owned government sponsored enterprises &

----Strengthen regulation

----Reduce their size

-Heightened regulation to limit financial institutions’ risk taking

-Increased regulation of credit-rating agencies

--Restrict conflicts of interest

-Additional regulation of derivatives (especially gambling and pure speculative products without direct benefit to ‘real economy’)

-{Limiting the size of any single financial company (no more ‘Too Big To Fail’ companies that governments must save due to systemic risk = they may cause the entire financial system to collapse due to linkages in modern monetarized capitalism)}.

-The danger {costs?} of over-regulation.

-{The dangers of under-regulation---costs and systemic risks}

-{The necessity of constant surveillance of new financial devlopments to prevent new institutions and institutional-linkages from creating new systemic risks}

            -{Proactive regulatory policy-making (before financial storms and crises)}

 

===========

FUTURE OF INTERNATIONAL BANKING REFORMS:

 

*Basel 2: Reform of the original (1988) Basel accords (so-called Basel 1)

            -Plan was to implement them all by 2008

-The Basel 2 accord tries to link capital to actual risks carried by mainly international banks, by adopting worldwide its 3 ‘pillars’:  (I) More categories of degree-of-risk for assets to increase accuracy and/or allowing internationally sophisticated banks to have own internal risk system analysis; (II) stronger supervision;  (II) more disclosure to public view (i.e. transparency for anyone to see what is occurring).

 

Basel 3: Now being debated, discussed, developed;  it goes even beyond Basel 

Ch12 (8th edition) STRUCTURE of CENTRAL BANKS….

----in the U.S.A. the CB is called the ‘FEDERAL RESERVE SYSTEM’ and in the Euro-currency-zone of Europe it’s called ECB,

----also brief accounts of central banks of Canada, England (UK), and Japan

 

--(Note:  In the 9th edition, this chapter became chapter 13—Mish9ed_c13...)

--(Note: In 6th edition study guide this was chapter 14 Mish6ed_StGuide_14)

 

-Read only material on pages 321-326

-Do not read the rest of the chapter

 

-Ignore (forget) the questions at end of chapter (too institutionally-focused on the USA) 

========================================

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REQUIRED SECTION in Chapter and lecture:

 

CENTRAL BANKS: GOALS—ONE OR SEVERAL?

 

*Standard Goal of Central Banks since 1970s: The Price Stability Goal

• Low and stable inflation

• Inflation (too high rate of price increases) is a problem

–      Creates uncertainty and difficulty in planning for the future

–      Lowers economic growth (possibility)

–      Strains social fabric (losers/creditors and winners/debtors in short and medium run)

• Nominal anchor to contain inflation expectations

• Time-inconsistency problem 

 

*Other Goals of Monetary Policy beyond price stability