Banking and financial crises in United States history: what guidance can history offer policymakers?
AbstractThis paper assesses the validity of comparisons between the current financial crisis and past crises in the United States. We highlight aspects of two National Banking Era crises (the Panic of 1873 and the Panic of 1907) that are relevant for comparison with the Panic of 2008. In 1873, overinvestment in railroad debt and the default of railroad companies on that debt led to the failure of numerous brokerage houses, precursor to the modern investment bank. During the Panic of 1907, panic-related deposit withdrawals centered on the less regulated trust companies, which had only indirect access to the existing lender of last resort, similar to investment banks in 2008. The popular press has made numerous references to the banking crises of the Great Depression as relevant comparisons to the recent crisis. This paper argues that such an analogy is inaccurate. The previous banking crises in U.S. history reflected widespread depositor withdrawals whereas the recent panic arose from counterparty solvency fears and large counterparty exposures among large complex financial intermediaries. In historical incidents, monitoring counterparty exposures was standard banking practice and the exposures were smaller. From this perspective, the lessons from the past appear less directly relevant for the current crisis.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 1009.
Date of creation: 2010
Date of revision:
Other versions of this item:
- Tallman, Ellis W & Wicker, Elmus R., 2009. "Banking and Financial Crises in United States History: What Guidance can History Offer Policymakers?," MPRA Paper 21839, University Library of Munich, Germany.
- N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- N21 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: Pre-1913
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-08-14 (All new papers)
- NEP-CBA-2010-08-14 (Central Banking)
- NEP-HIS-2010-08-14 (Business, Economic & Financial History)
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