A historical digression
Cecchetti and Schoenholtz argue that at the beginning of the financial crisis the Federal Reserve transformed itself into a modern version of Bagehot’s lender of last resort in order to manage a pure liquidity crisis caused by the run on Bear. During the period between Bear’s rescue and the failure of Lehman the crisis morphed into an emerging solvency crisis which after the Lehman collapse forced the Fed to focus on the recapitalization of the financial system, something that was far beyond the the role of any lender of last resort.
Ten Years After Bear
By: Stephen G. Cecchetti, Kermit L. Schoenholtz – Brandeis University, New York University
Going forward
In the future there is consensus that major banks will be reluctant to buy a collapsing one and Dodd Frank has rendered illegal any help from the Fed. If another financial crisis hit the solution could be an orderly liquidation of failing firms.
Where will the next crisis come from? Look instead and ask, where is there a mountain of debt that can’t be paid back, a bunch of really obscure accounting, off the books credit guarantees? China’s great wall of debt suggests one answer.
Bear Stearns Anniversary
By: John Cochrane – Stanford University
The next Minsky moment
It was after Bear Sterns and Lehman that the Financial Stability Board identified repos as systemic shadow markets that need tight regulation in 2011. Fast forward seven years and the term “shadow banking” is no longer used in a pejorative way, instead repo is considered “the “plumbing” that circulates securities between asset managers, institutional investors, market-making banks and leveraged investors, “greasing” securities’ liquidity (ease of trading). It allows financial institutions to borrow against securities collateral and to lend securities to those betting on a change in price. This is why international institutions, from the FSB to the IMF and World Bank, have insisted that developing and emerging economies seeking to build resilient market-based finance need to (re)model their repo plumbing according to a ‘Western’ blueprint.”
Waiting for the Chinese Bear Stearns
By: Daniela Gabor – Institute for New Economic Thinking
