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A Year of Living Dangerously: The Management of the Financial Crisis in 2008

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  • Vincent Reinhart

Abstract

There are many reasons to regret the decision of U.S. financial authorities to insert the government into the resolution of the investment bank Bear Stearns in March 2008. The Federal Reserve's use of its discount window built up false hope of future rescues. Paying off the uninsured creditors of Bear Stearns overcompensated them at the time and invited speculative attacks on the equity of similarly situated firms. I will argue that the market seizure after Lehman Brothers' decision to seek the protection of bankruptcy was an echo of the prior official decision to protect Bear Stearns.

Suggested Citation

  • Vincent Reinhart, 2011. "A Year of Living Dangerously: The Management of the Financial Crisis in 2008," Journal of Economic Perspectives, American Economic Association, vol. 25(1), pages 71-90, Winter.
  • Handle: RePEc:aea:jecper:v:25:y:2011:i:1:p:71-90
    Note: DOI: 10.1257/jep.25.1.71
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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.25.1.71
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    References listed on IDEAS

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    5. Carmen M. Reinhart & Vincent R. Reinhart, 2009. "When the North Last Headed South: Revisiting the 1930s," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(2 (Fall)), pages 251-276.
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    8. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 56(3), pages 291-299, September.
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    10. repec:aei:rpaper:30944 is not listed on IDEAS
    11. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
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    Citations

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    Cited by:

    1. Antoniades, Adonis, 2015. "Commercial bank failures during the Great Recession: the real (estate) story," Working Paper Series 1779, European Central Bank.
    2. Annabi, Amira & Breton, Michèle & François, Pascal, 2012. "Resolution of financial distress under Chapter 11," Journal of Economic Dynamics and Control, Elsevier, vol. 36(12), pages 1867-1887.
    3. Thomas Conefrey & David Cronin, 2015. "Spillover in Euro Area Sovereign Bond Markets," The Economic and Social Review, Economic and Social Studies, vol. 46(2), pages 197-231.
    4. Olivier Armantier & John Sporn, 2013. "Auctions implemented by the Federal Reserve Bank of New York during the Great Recession," Staff Reports 635, Federal Reserve Bank of New York.
    5. Cornelia Woll, 2015. "Politics in the Interest of Capital: A Not-So-Organized Combat," Sciences Po publications 15/2, Sciences Po.
    6. repec:aei:rpaper:31217 is not listed on IDEAS
    7. Ng, Travis, 2014. "Bailing outsourcing," Journal of Comparative Economics, Elsevier, vol. 42(4), pages 983-993.
    8. Ashoka Mody & Damiano Sandri, 2012. "The eurozone crisis: how banks and sovereigns came to be joined at the hip," Economic Policy, CEPR;CES;MSH, vol. 27(70), pages 199-230, April.
    9. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 56(3), pages 291-299, September.
    10. Woll, Cornelia, 2015. "Politics in the interest of capital: A not-so-organized combat," MaxPo Discussion Paper Series 15/2, Max Planck Sciences Po Center on Coping with Instability in Market Societies (MaxPo).
    11. Baldursson, Fridrik Mar & Portes, Richard, 2013. "Gambling for resurrection in Iceland: the rise and fall of the banks," CEPR Discussion Papers 9664, C.E.P.R. Discussion Papers.

    More about this item

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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