Index

accomptable notes, 5 Bagehot, Walter, 1–4, 7, 99, 202 accounting arbitrage, 293–4 Baker, James, 170 African Development Bank, 182 balance of payments, 8, 10, 11, 18, 117, 147, aggregate money supply, 285 149, 160, 162–4, 169, 170, 177, 179, innovation in composition of, 291–3, 312 180, 182, 196 Agricultural Adjustment Administration adjustment, 112, 113, 158, 159, 162, (AAA), 70, 72, 241, 245, 246, 287, 288, 193–4, 195 300, 302 crisis, 76 Agricultural Bank, 136 deficits, 110, 162, 163, 194, 197 Aid to Dependent Children (ADC), 247 equilibrium, 110 Aid to the Blind (AB), 247 shocks, 114 AIG, 234 surpluses, 110, 194 fall of, 213 Bank Charter Act of 1844, 1, 7 Aldrich–Vreeland Act, 94 bank crises, 18–23 Allied Irish bank, 87 Bank for International Settlements (BIS), 12 Applegarth, Adam, 271, 274, 276, 277 bank holding companies (BHCs), 297–9 arbitrage, 80, 108, 118, 206, 221, 283, 287, 291, Act, 103 312 Banking Act of 1935, 100 accounting, 293–4 Banking Act of 1979, 12 capital, 293–4 banking industry, 25–6 gold-point, 109, 113 banking instability, changing perceptions of, limited arbitrage, bubbles due to, 32–3 20–3 tax, 293–4 bank loans, 39, 263 Argentine financial crisis, 176–7 Corporation, 213 ASEAN + 3, 199 Bank of Credit and Commerce International Asian Currency Unit, 199 (BCCI), 13 Asian Development Bank, 199 (BoE), 1–2, 5–16, 45, 111, Asian financial crisis of 1997–98, 172–5 113, 117, 149, 251–7, 260, 261, 263, Asian Monetary Fund, 199 264, 266, 267 asset-backed commercial paper (ABCP) Asset Purchase Facility, 254 conduits, 286–7, 290, 293, 298 independent and focused, 14–16 reforms relating to, 306–7 Monetary Policy Committee (MPC), 252–3, asset-backed securities (ABS), 286, 294, 263, 264 297–300, 302, 303, 306 objectives and functions, evolution of issuers, 287–8, 297 (1694–1914), 5–8 private-label, 307 Quarterly Bulletin, 255 warehousing, 297 as subservient Bank (1914–1992), 8–14 Asset Purchase Facility (APF), 254 Bank of England Act of 1694, 5 asset quality, of shadow banking, 301–3 Bank of England Act of 1697, 5 Association of South East Asian Nations , 111, 113 (ASEAN), 199 Bank of Ireland, 6, 87 asymmetric information bubbles, 31–2 Bank of Japan (BoJ), 221–3, 253, 255–7, ‘availability of credit’ doctrine, 90, 102, 334 259, 266 342 Index

Bank of Montreal, 19 Bundesbank, 14 Bank of Scotland, 6 Bureau of Labor Statistics (BLS), 98 Bank of , 21 Burns, Arthur F., 103 , 111, 114, 117, 251, 253 Bush, George, 237 Bankruptcy Amendments and Federal Judgeship Act of 1984, 289 CAC 40, 257 Banque Générale, 211 call market (CM), 209 Baring Brothers and Co., 7 Camdessus, Michel, 181 Barings, 13 capital Basel accords of 1988, 26 account liberalization, 41 Basel II, 275–7, 281 arbitrage, 293–4 Market Risk Amendment of, 309 controls, 39–42 Basel Committee on Banking Regulation and benefits of, 40 Supervisory Practices, 12 costs of, 40 Bear Stearns, 303, 305 empirical evidence on, 40–2 subprime mortgage loans, 324, 325, 332 history of debate, 39–40 Bernanke, Ben, 237 mobility, 198 biases requirements, for securitisation exposures, amplifying, 207–8 309–10 attenuating, 206 capitalism, money manager, 233–9 deflation, 224–6 Carter, Jimmy, 104 inflation, 224 Case–Shiller repeat-sales index, 332 ‘Big Bang’,12 CBOE Internet Index, 28 Black, William, 236 Central Bank of Greece, 123 Blunden, George, 12 Cerberus, 280 Blunden Committee, 12 Chiang Mai Initiative, 178, 199 BNP Paribas, 287, 325 Chicago Board Options Exchange, 104 Bradford & Bingley, 273, 278, 280 Chicago Mercantile Exchange, 205 Brady Plan, 170, 174 Citigroup, 286 branch banking, 6, 19 Civilian Conservation Corps (CCC), 244, 245 branching liberalization, 26 Civil Works Administration (CWA), 244 , 10, 39, 169, 170, 192, clearing houses, 20 199, 201, 251 Clearing Union, 158–60 collapse of, 163, 183 Clinton, Bill, 106 consequences of, 161–2 Clough, Arthur Hugh, 1 evolution of, 196–7 collateralised loan obligations (CLOs), 286, intentions of, 158–60 288, 298, 399 new, 198–9 collateralised mortgage obligations (CMOs), Bryce, Lord, 1 286, 288 Bubble Act, 323 collateralized debt obligations (CDOs), 70, 235, bubbles, 28–35, 89–93, 207, 208 286–8, 294, 297, 299–303, 325–6, 330, asymmetric information, 31–2 332 bubble-riding hypothesis, 33 collective action clauses (CACs), 86, 174–5 experimental evidence, 34–5 collective bargaining, 3, 134, 241, 246–7 heterogeneous beliefs, 33–4 commercial banks in history, 37–8 shadow credit intermediation, 297–9 due to limited arbitrage, 32–3 Commercial Paper Funding Facility, 253 Mississippi Bubble, 28, 37, 316 commercial real estate (CRE) bonds, 294 rational, under symmetric information, 28–31 Commission and Committee of European South Sea Bubble, 28, 37, 207, 316, 321–3 Banking Supervisors (CEBS), 85 speculative, 316–18 Committee on Currency and Foreign theory, 327–8, 332–4 Exchange, 8 Index 343

commodity bubble, 29 reduction, 125 Compagnie des Indes, 212 sovereign, 18, 77, 87, 172, 253, 261, 263 Compagnie d’Occident, 211–12 sustainability, 76 contagion, bankruptcy and, 216–17 debt-deflation hypothesis, 155 contingency clause, of convertibility deflation bias, 224–6 conversion, 111, 115 deposit insurance, 21–2, 25 Contingent Credit Lines (CCL), 177 Depository Institutions Deregulation and continuous double auction (CDA) market, 204, Monetary Control Act, 104 205, 209 Depository Trust Clearing Corporation Cooke, Peter, 12 (DTCC), 287 Cooke Committee, 12 de Rato, Rodrigo, 182 corporate bond market, credit rating agencies discounting effect, 206 in, 71–2 Discount Office, 12 corset, abolition of, 13 discretionary monetary policy, resumption of, cost(s) 101–3 of capital controls, 40 disposition effect, 206 induced, 204 dissecting financial markets, 205–6 cost-push theory, 13 Dodd–Frank and Covered Bond Purchase program (CBPP), 254 Consumer Protection Act of 2010 credible commitment (DFA), 218, 306 to convertibility, 111–13 Orderly Liquidation Authority (OLA), 214, implications of, 113 215, 219, 307 credit, 2‘availability of credit’ doctrine, 102 Section 932A, 311 crunch chronology, 44–69 Section 941, 311 hedge funds, 297 Section 942, 310, 311 market reforms, 311–12 Title II, 219 ratings, over-reliance on, 294–5 Dragnet, 213 tranches, 160 Dutch disease, 40 union, 160, 172, 179 DVP (delivery versus payment) repo, 289, 305 credit default swaps (CDS) market, 213, 216, dynamic stochastic general equilibrium (DSGE) 217, 235, 300 model, 155, 156, 259 credit rating agencies (CRAs), 70–3, 311–12 in corporate bond market, 71–2 Eccles, Marriner, 100, 101 history of, 70 Economist, The,1,4 industry structure, important aspects of, 70–1 EC Snake, 197, 199 structured finance markets, 72–3 écus de banque, 211 Credit Rating Agency Reform Act of 2006, 312 electoral cycles, 131–2 Crockett, Andrew, 184 emergency relief, 243–5 Crockett Committee, 184–5 ‘employer of last resort’ program, 238–9 Cunliffe Committee Report, 8 errors currency crises, 75–8 amplifying, 207–8 models, 79–82 attenuating, 206 Current Account deficits, 125–7, 130 Eurodollar, 12 current account problems, crises with, 77 European Central Bank (ECB), 84, 86, 119, 168, 254–5, 267 Darling, Alistair, 273, 280 Covered Bond Purchase program, 254 DAX 30, 257 Main Refinancing Rate, 251, 253, 263 debt Securities Markets Programme, 254 crises, 18, 75, 169–70 Stability and Growth Pact, 199 deflation, 155, 230–4, 236 European Community Support Framework, escalation, 120–3 134 management, 10 European Currency Unit (ECU), 76, 199 344 Index

European Financial Stability Facility (EFSF), Act, 94, 100 85–8 of New York, 218, 307 European Financial Stabilization Mechanism Federal Reserve System, 19, 94–107, 148, 149, (EFSM), 85, 86, 88 152, 232, 242 European Monetary System (EMS), 199 discretionary monetary policy, resumption crises of 1992 and 1993, 76 of, 101–3 exchange rate mechanism, 14, 164 early years of, 94–8 European Monetary Union, 199–200 financial deregulation, 104–7 European Stability Mechanism (ESM), 86, 88 flexible exchange rates, 103–4 European Union (EU), 119, 135, 167 recovery, Second World War and, 101 Eurozone, 119, 120, 124, 126–30, 135, 136, responding to Great Depression, 98–9 139–41, 199, 251–3 restructuring, 99–101 crisis 2010, 84–93 Fforde, John, 11 chronology of, 84–9 Financial Accounting Standards (FAS), 306, root causes of, 89–93 310 quantitative easing, 251–3, 255, 258, 263–4 Financial Accounting Standards Board (FASB), ex ante buffer, 308–9 293, 306 exchange controls, administration of, 11, 12 financial crisis of 2007–2009, 72–3, 237 exchange rate mechanism (ERM), 14, 76 financial deregulation, 104–7 alternative, 192–3 financial excesses, crises of, 77, 78 Exchequer bill, 5–7 financial instability hypothesis, 230 expectations Financial Sector Assessment Program (FSAP), rational expectations theory, 37 166 shaping, 226–8 Financial Services Authority (FSA), 273–9, 281 experimental tests, 31 Tripartite Committee, 274 ex post buffer, 309 Financial Services Modernization Extended Financing Facility (EFF), 179, 180 (Gramm–Leach–Bliley) Act, 106 Extended Structural Adjustment Facility Financial Stability Board (FSB), 291 (ESAF), 180 Financial Stability Oversight Council (FSOC), external deficits, role in financial crisis, 130 308 financing, 194 Fair Labor Standards Act of 1938 (FSLA), 247 versus adjustment mechanisms, 194–5 Fannie Mae, 213, 254, 324 official, 194 Farm Credit Administration (FCA), 245 private, 194 farm programmes, 245 finite maturity, securities with, 29 Farm Security Administration (FSA), 245 First Basel Concordat, 12 Federal Deposit Insurance Corporation (FDIC), fiscal adjustment, failure in, 133–4 214, 216, 218, 243, 282, 297, 298, 300, fiscal deficits, crises with, 77 303, 306, 307 Fisher, Irving, 236 safe harbour, 310, 311 flexible exchange rates, 103–4 Federal Emergency Relief Administration floating exchange rates, 103, 163, 196, 197, (FERA), 243–4, 246 198, 251 Rate (FFR), 104, 105–6, 251, foreclosure, 237, 279, 326, 328, 329, 332, 333 252, 259 foreign direct investment, 39, 126 Federal Home Loan Mortgage Corporation, Franklin National, 12 103 Freddie Mac, 213, 254, 324 Federal Housing Administration (FHA), Free Banking Era, 291 243, 246 Friedman, Milton, 13 Federal Housing Finance Authority, 213 fringe (secondary) bank crisis of 1973/74, Federal National Mortgage Association, 103 11–12 Federal Open Market Committee (FOMC), FTSE 100, 257 99–106, 254, 262 fundamental disequilibrium, 159–62 Index 345

Fundamental Theorem of Asset Pricing, 333 ‘Great Society’ programme, 163 funding fragility, of shadow banking Greece, 119–41 institutions, 303–4 Central Bank of Greece, 123 conditionality programs for, 142–3 Garn–St Germain Act, 105 crisis of 2008, 128–30 GCF (general collateral finance) repo, 289 Current Account deficits, 125–7 G8, 167–8, 182 debt escalation, period of, 120–3 Geithner, Timothy, 236–7 debt reduction, 125 General Agreement on Tariffs and Trade debt stabilization, 123–8 (GATT), 162 EMU membership, 123–8 Gladstone, W.E., 3 market reforms, implementation of, 124 Glass, Carter, 100 Memorandum, ex post assessment of, 132–5 Glass–Steagall Act of 1932, 99 new Memorandum conditionalities, 135–40 Glass–Steagall Act of 1933, 26, 99, 106, 243 Post-EMU fatigue, 124–5 Global Financial Stability Report, 166 gross capital income, 231 Goldman Sachs, 235, 280 Group of Ten, 199 gold standard, 8, 9, 96, 97, 108–18, 146–52, 154, 156, 158, 159, 192, 195, 201, 202, Harrison, George L., 97, 99 242 Heavily Indebted Poor Countries (HIPC) breakdown of, 114–15 Initiative, 181, 182, 185 core countries of, 109 hedge funds, bank-affiliated, 283 credible commitment Herstatt, 12 to convertibility, 111–13 heterogeneous beliefs bubbles, 33–4 implications of, 113 Hilferding, Rudolf, 237 instability, elements of, 109–10 HMT, 280 interwar gold standard HM Treasury, 9–11, 13–15 breakdown of, 117–18 Home Mortgage Disclosure Act (HMDA), 325 instability of, 116–17 Home Owners’ Loan Corporation (HOLC), periphery, experience of, 114 243, 246 price specie-flow mechanism, 110 Hoover, Herbert, 243 rules of the game, 111 house price appreciation (HPA), 327, 332 stability, enhanced by government policies, Hutton, Richard Holt, 1 113–14 hyperbolic effect, 206 types of, 108–9 government-sponsored enterprises (GSEs), induced cost, 204 254, 283 induced value, 204 government-sponsored shadow banking, 300–1 industrial policies, 246–7 Governor and Company of the Bank of Indymac, 332 England, 5 infinite maturity, securities with, 29 Governors Executive Committee, 96 inflation, 10, 13, 81, 92, 102 Great Depression, 20–1, 98–9, 115, 117, 118, of the 1970s, 163 118, 144–52, 196, 201, 202, 219, 221, bias, 224 222, 230, 232, 237, 238, 239, 248, 257, target, 14, 15, 264 258, 292, 294 insider/outsider theory, 326, 328–32 analysis of, 146–7 consistent with information economics, 331 complications of, 150–1 credit standards, worsening, 329–30 and liquidity trap, 228 interest-rate resets, 328–9 magnitude, 144–6 investors knew about subprime securities, 330 monetary and financial forces in, 154–7 prime borrowers steered into subprime narrative of, 147–50 mortgages, 329 recovery from, 151–2 profit at expense, 332 ‘greater fool’ theory, 207–8 insurance, deposit, 21–2 346 Index

International Financial Statistics, 166 interwar gold standard International Monetary Fund (IMF), 39, 85, 86, breakdown of, 117–18 88, 119, 136, 146, 158–86, 192, 196, instability of, 116–17 203, 234 Investment Company Act of 1940, 297 Articles of Agreement, 160, 162, 164, 165–6, 167, 177, 179, 183, 197 J.C. Flowers, 280 – breakdown of, 162 4 Jevons, W.S., 2, 3 – Bretton Woods system and, 158 62 Johnson–Matthey, 13 Committee of Twenty, 195 joint stock banking, 6, 7 and crises in emerging markets since 1980, Joseph, Keith, 13 – 168 79 JPMorgan Chase, 325 Executive Board, 159, 160, 168, 184 Extended Financing Facility, 179, 180 Financial Sector Assessment Program, 166 Kalecki, Michal, 231 future of, 182–6 Keating, Charles, 236 Global Financial Stability Report, 166 Keating Five, 236 Heavily Indebted Poor Countries Initiative, Kennedy, John, 102 – 181, 182, 185 Kindleberger, Charles P., 201 3 Independent Evaluation Office (IEO), 168, 173 laboratory financial markets, 204–9 International Financial Statistics, 166 agents, 208–9 and low-income countries, 179–82 biases and errors, amplifying, 207–8 Medium-Term Strategy, 167, 183 biases and errors, attenuating, 206 Multilateral Consultation, 167 dissecting financial markets, 205–6 Multilateral Debt Relief Initiative, 182 early, 204–5 Oil Facility Subsidy Account, 179 formats, 208–9 Policy Support Instrument, 182 prediction markets, 208–9 and policy surveillance, 164–8 labour policies, 246–7 Poverty Reduction and Growth Facility, Large Scale Asset Purchases (LSAPs), 254, 181, 182 261, 262 Poverty Reduction Strategy Paper, 181, 182 Latin American debt crisis, 169–70 reconfiguration of, 162–4 Law, John, 37, 211–12 Regional Economic Outlooks, 166, 181 laws of motion, 2 Selected Economic Issues, 166 laws of wealth, 2 Sovereign Debt Restructuring Mechanism, Lawson, Nigel, 13–14 174, 198 Lehman Brothers, 252, 280, 332 Special Data Dissemination Standards, 171 bankruptcy, 84, 213–19, 290, 307, 325 special drawing rights, 162, 197, 198, 200 and contagion, 216–17 Trust Fund, 179–80 facts of, 213–14 World Economic Outlook, 166, 168 international issues, 215 international monetary institutions, 192–200 interpreting facts, 214–15 adjustment mechanisms, 193–4 policy implications, 219 adjustment versus financing, model of, and qualified financial contracts, 194–5 217–18 alternative exchange rate mechanisms, subprime mortgage loans, 324 192–3 ‘lender of last resort’ program, 238 evolution of, 195–200 Lend Lease, 159 financing, 194 leverage, 89–93, 234, 289, 304 markets, role of, 195 Liberty Loans, 95 reserve assets, 193 limited arbitrage, bubbles due to, 32–3 International Swaps and Derivatives limited-purpose finance companies (LPFCs), Association, 217 297 Index 347

liquidity Memorandum backstops, 304–6 agreement, 119, 120 market, 256 conditionalities, 135–40 regulation, 310 ex post assessment of, 132–5 trap, 221–8 Merrill Lynch, 213 deflation bias and optimal commitment, Mexican ‘Tequila’ crisis, 170–2 224–6 Mill, John Stuart, 1 expectations, shaping, 226–8 Millennium Development Goals (MDGs), 181 Great Depression and, 228 Miller, Harvey, 217 irrelevance results, 223–4 minimum balance at risk (MBR), 309 modern view of, 221–3 Minsky crisis, 230–9 liquidity coverage ratio (LCR), 310 aftermath of money manager capitalism literary studies, 1 collapse, 238–9 livres tournois, 211, 212 money manager capitalism and, 233–8 Lloyds, 280 Minsky’s theory of the business cycle, 231–3 loan(s) Mississippi Bubble (1719–20), 28, 37, 316 bank, 39 Mohamad, Mahathir bin, 174 Liberty, 95 Monetary Control Act, 104 Victory, 95 money manager capitalism, 233–8 Lomax, Rachel, 10 collapse of, 238–9 London Clearing House, 7 money market, reforms relating to, 306–9 London Discount Market Association, 11 money market mutual funds (MMMFs), 104, longer-term refinancing operations (LTROs), 105, 214, 283, 284, 289, 290, 297 254, 261, 263 reforms relating to, 307–9 Long Term Capital Management, 234 money printing, 262, 264 long-term interest rates, 102, 222 moral hazard, 76, 172, 175, 177–8, 198 long-term notes (LTN), 286 mortgage-backed securities (MBS), 72–3, 235, 254, 257, 262, 286, 288, 302 Maastricht Treaty, 199 Mortgage Bankers Association, 325 Madoff, Bernie, 231 Multilateral Debt Relief Initiative (MDRI), 182 Main Refinancing Operation (MRO), 254 Main Refinancing Rate (MRR), 251, 253, 263 NASDAQ, 205 market Nasdaq Composite Index, 316 agents, 208–9 National Association of Realtors, 332 call, 209 National Banking Act of 1863, 292 continuous double auction, 204, 205, 209 National Banking Act of 1864, 292 corporate bond, credit rating agencies in, National Bureau of Economic Research 71–2 (NBER) credit default swaps, 213, 216, 217, 235, Business Cycle Dating Committee, 258 300 National Industrial Recovery Act of 1933 formats, 208–9 (NIRA), 151, 156 laboratory financial, 204–9 National Labor Relations Board (NLRB), 247 liquidity, 256 National Labor Relations (Wagner) Act of prediction, 208–9 1935, 246 role of, and international monetary nationally recognised statistical rating institutions, 195 organisations (NRSROs), 70, 312 structured finance, 72–3 National Monetary Commission, 94 Marshall, Alfred, 3 National Pension Reserve Fund, 86 Martin, William McChesney, Jr., 101, 103 National Recovery Administration (NRA), 241, Maturity Extension Program (MEP), 261–2 242, 246, 247 Medium Term Financial Strategy, 13 National Reserve Association, 94 medium-term notes (MTN), 286 neglected risk, 301, 302 348 Index

negotiable order of withdrawal (NOW), 104, 105 Penn Square Bank, 216 net asset value (NAV), 290, 307–8, 309 Peston, Robert, 273 net stable funding ratio (NSFR), 310 Phillips curve analysis, 13 New Deal, 230, 237–9, 241–8 Plaza Accord of September 1985, 167 emergency relief and public works policy programmes, 243–5 economy, 1–4 farm programmes, 245 signalling, 256 industrial and labour policies, 246–7 surveillance, 164–8 lender, 243 Policy Support Instrument (PSI), 182 monetary, banking, and international policy, Ponzi, Charles, 231 242–3 portfolio Social Security Act of 1935, 247–8 investment, 39, 41 spending, political economic geography of, rebalancing, 256 245–6 posted offer (PO), 209 New York Stock Exchange (NYSE), 205 Poverty Reduction and Growth Facility Niemeyer, Sir Otto, 9 (PRGF), 181, 182 Nixon, Richard, 103 Poverty Reduction Strategy Paper (PRSP), noise traders, 318 181, 182 Non-Accelerating Inflation Rate of prediction markets, 208–9 Unemployment (NAIRU), 265 present value, 125, 170, 316, 317 Norman, Montagu, 9, 11, 97 price specie-flow mechanism, 110 North American Free bTrade Agreement Primary Dealer Credit Facility, 218 (NAFTA), 170 Private Sector Involvement (PSI), 135, 136 privatizations, failure of, 135 Obama, Barack, 236 Public Buildings Administration (PBA), 244 Oil Facility Subsidy Account, 179 public debt, 119, 121–5, 133, 137–9, 141, 143, Old-Age Assistance (OAA), 247 173, 317 Oliphant, 280 Public Roads Administration (PRA), 244 OPEC (Organization of Petroleum Exporting public spending, cyclicality of, 131 Countries), 197 Public Works Administration (PWA), 244 Open Market Investment Committee (OMIC), 96 public works programmes, 243–5 Open Market Policy Committee (OMPC), 97–9 purchasing power parity (PPP), 79 options pricing approach, 293 Orderly Liquidation Authority (OLA), 214, qualified financial contracts (QFCs), 217, 218 215, 218, 307 quantitative easing (QE), 221, 223, 224 Organization of Petroleum Exporting impact of, 257–61 Countries (OPEC), 197 inflation accelerated during, 264–6 original sin, 193 negative side effects of, 266–7 ‘originate-to-distribute’ model, 298–301, 325 transmission channels orthodox metallism, 112 confidence, 255 Overend, Gurney and Co., 7 market liquidity, 256 overfunding, 13 money, 256 overlapping generations (OLG) model, 29 policy signalling, 256 ownership society, 237 portfolio rebalancing, 256 in United Kingdom, 253–66 Palmer, Horsley, 7 in United States, 253–66 Palmer rule, 7 by western central banks during global Paris Club, 169, 180, 182 financial crisis, 251–67 Parliamentary Committee on the High Price of Bullion, 6 Radcliffe Report, 11 Paterson, William, 5 Rating Agency Act. See Credit Rating Agency Penn Central Transportation Company, 103 Reform Act of 2006 Index 349

rational bubbles under symmetric information, exposures, capital requirements for, 309–10 28–31 of loans, 306 rational expectations theory, 37 originate-to-distribute, 299 real estate investment trusts (REITs), 283, transactions, 306, 310–12 284, 286 self-fulfilling crises, 77, 78, 81 Reciprocal Trade Agreement Act (RTA), 242–3 shadow banking, 282–312 Reconstruction Finance Corporation (RFC), 21, commercial banks, 297–9 99, 242, 243 external, 299–300 Regional Economic Outlooks, 166, 181 government-sponsored, 300–1 regression analysis, 30 independent, 300 , 243, 290 see also shadow credit intermediation Reichsbank, 111, 148 shadow credit intermediation, 282–312 relationship lending, 25, 26 accounting arbitrage, 293–4 repurchase agreement (repo) aggregate money supply, innovation in delivery versus payment, 289 composition of, 291–3 general collateral finance, 289 asset quality, 301–3 tri-party, 288–90, 307 banking regulation reforms, 309–10 reserve assets, 193 capital arbitrage, 293–4 Reserve Augmentation Line (RAL), 177 credit market reforms, 311–12 Reserve Primary Money Fund, 214, 216, 290 definition of, 282–3 retail sweep programmes, 106 examples of, 286–90 Richardson, Gordon, 10, 12 existence of, 290–5 Riefler–Burgess Doctrine, 98 financial markets, agency problems in, 294–5 risk functionality of, 295–301 fundamental, 32 funding fragility, 303–4 noise trader, 32–3 liquidity backstops, 304–6 retention, 311 measurement of, 283–6 synchronization, 33 money market, reforms relating to, 306–9 Roosevelt, Franklin Delano, 21, 100, 228 regulation of, 301–12 New Deal. See New Deal tax arbitrage, 293–4 Royal Bank of Scotland, 5, 6, 11 see also shadow banking ‘rules of the game’, 111, 117 Shared National Credit Program (SNC), 298 Run on the Rock, The, 271–81 short-term interest rates, 97, 103, 104, 111, 221, antecedents of run, 274–8 222, 228, 251–3, 256, 264, 267, 328 subsequent history, 278–80 , 197 Rural Electrification Administration (REA), Smoot–Hawley Tariff Act of 1930, 242, 151 245 Social Security Act of 1935, 247–8 Russian financial crisis, 175–6 solid judgement, 4 South Sea Bubble (1720), 28, 37, 207, 316, S&P 500, 257, 262 321–3 Securities Act of 1933 consequences of, 322–3 Section 7, 311 interpretations of, 321–2 Section 11, 311 South Sea Company, 5, 321 securities arbitrage conduits, 297 sovereign debt, 172, 261, 263 Securities Exchange Act of 1934, 99 problems, crises of, 18, 77, 87, 253 Securities Industry and Financial Markets Sovereign Debt Restructuring Mechanism Association (SIFMA), 291 (SDRM), 174, 198 Securities Markets Programme (SMP), 254 special drawing rights (SDRs), 162, 197, 198, securitisation, 255, 271, 278, 282, 285, 287, 291, 200 294, 300, 301, 306 special investment vehicles, 286 -based lending, 295 special-purpose vehicles (SPVs), 286 BHC involvement in, 298, 299 Special Resolution Law, 273 350 Index

Special Resolution Regime (SRR), 273 Uncollateralised Overnight Call Rate (UOCR), speculative bubbles, 316–18 251, 253 stationary repetition, 204 UNDP, 180 sterling crisis of 1967, 163 unemployment, 144–5 Strong, Benjamin, 95, 97, 150 UNICEF, 180 structural adjustment, limits of, 134 United Nations (UN), 180 Structural Adjustment Facility (SAF), 180 Millennium Development Goals, 181 structured finance markets, 72–3 United Nations Commission on International structured investment vehicles, 286, 297, Trade Law, 215 301, 302 United States (US) subprime lending, rise and fall of, 324–8 bankruptcy law bubble theory, 327–8 and complex financial institutions, 215–16 insider/outsider theory, 326 scope of, 218–19 subprime mortgage crisis, 324–35 banks, unusual historical instability of, 19–20 policy implications, 334–5 Investment Company Act of 1940, 297 testing theories of, 328–34 panic of 1907, 19 sudden-stop crises, 77, 78 Savings and Loan industry, 21 sunk-cost fallacy, 206 Securities and Exchange Commission (SEC), surplus funds, 7 207, 214, 307, 308, 310–12 Securities Investor Protection Act, 218 tax arbitrage, 293–4 Treasury, 113, 170, 174, 213, 234, 257 Tax Reform Act of 1986, 105 Taylor Doctrine, 174, 175, 177 value added tax (VAT), 122, 133, 142 Taylor Rules, 253 variance bounds, 31, 316 Tennessee Valley Authority (TVA), 244 Vector Autoregressive Model (VAR), 259, 260 Term Asset-Backed Securities Loan Facility Victory Loan, 95 (TALF), 253 Virgin Group, 280 Term Auction Facility, 253 Volcker, Paul A., 104, 105 Tesco, 280 Volcker Rule, 299 Thatcher, Margaret, 13, 14 Voluntary Foreign Credit Restraint theory of intermediary leverage cycles, 304 programme, 102 total factor productivity (TFP), 154, 155 trade Walters, Alan, 14 intertemporal, 165 Wanless, Sir Derek, 274 liberalization, 41–2 War Loan Conversion of 1932, 10 unions, 3 Washington Mutual, 332 transversality condition, 29 Ways and Means Act, 5 tri-party repo, 288–90 White, Harry Dexter, 159, 196 reforms relating to, 307 , 292 Trust Fund, 179–80 Williams Deacon’s Bank, 11 tulipmania (1634–7), 28, 37, 207, 316, Wilson, Woodrow, 94 337–40 Works Progress Administration (WPA), fundamentals of, 338–9 244, 246 historical background of, 339–40 World Bank, 22, 126, 158, 161, 162, 169, 170, interpretation of, 340 180–2, 234 traditional image of, 337–8 Financial Sector Assessment Program, 166 twin crises, 18, 76 Worldwide Governance Indicators, 126, 127 World Economic Outlook, 166, 168 UK Financial Investments (UKFI), 280 ultima ratio mechanism, 85 zero intelligence (ZI) agents, 209