A Framework for the Analysis of Financial Disorder (discontinued from series - contact authors for copies)

Economists have often had a bad habit of preferring problems that were tractable to problems that were important. Some problems are both tractable and important, and so they are heavily studied and properly so. Some are tractable but unimportant, and they are often studied to an appalling degree. And some are intractable but important and these are largely neglected. That is more regrettable. Of these, one of the most important and least tractable is the problem of financial disorder. Aside from Hyman Minsky, it is the exclusive province of journalists and profit-seeking scare--mongers. Irwin Friend has never shied away from messy problems, if they were important. And frequently he has shown that messy problems are more tractable than many of his colleagues would have believed. If not for his example, we would not have had the courage to write this paper. This is an exploratory essay on the problem of financial disorder. It divides into three parts. The first part develops a general framework for analyzing disorder, the second applies the framework to the specific case of international banking, and the third examines whether lender of last resort facilities for dealing with international financial disorder are adequate.