DOCSLIB.ORG

Refuting Secular Stagnation in the Global Economy

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Refuting Secular Stagnation in the Global Economy FEATURE | REFUTING SECUlar StAGNATion in The GlOBal EcONOMY Refuting Secular Stagnation in the Global Economy By Paul Ehrlichman hen I read about a particular Most attempts to mathematically explain point of view about the future, markets and the economy fail miserably because they W I want to understand the philo- “ sophical framework that guides the writer’s ignore this distinctly human dynamic of anticipation, thinking. So here I define the key idea upon adaptation, imitation, and reflection. which my outlook on the global economy is built: ” Humans appear to be the only species with The Panic of 1873: A Better Parallel by real business conditions. Cheap U.S. foresight. The ability to abstractly ponder Ben Bernanke is a student of the Great goods flooded European markets in an consequences of our actions is both a bless- Depression of the 1930s. Because he was American commercial invasion that sent ing and a curse. Our foresight drives the chairman of the Federal Reserve during the thousands of European farmers, merchants, construct that predicting the future must 2008–2009 global financial crisis (GFC), and manufacturers into bankruptcy. change the future, and this construct tends the Great Depression has defined both pol- European banks became worried about sol- to result in a constant series of unexpected icy and the prevailing view of the global vency and began calling in overseas railroad outcomes. economy. It also has led to the expectation loans, choking the boom in U.S. rail con- of a long period of below-trend growth and struction. On September 18, 1873, the Most attempts to mathematically explain the risk of a deflationary spiral popularly investment bank Jay Cooke & Company markets and the economy fail miserably known as “secular stagnation.” declared insolvency. The New York Stock because they ignore this distinctly human Exchange then closed for 10 days. Over the dynamic of anticipation, adaptation, imita- But the Panic of 1873 might be a better guide next two years 18,000 businesses failed and tion, and reflection. Therefore, many of the for thinking about long-term developments the unemployment rate hit 8.8 percent. ideas I present below have been formed by in today’s global economy. Scott Reynolds Falling commodity prices and monetary- accounting for the complexity of human Nelson, a professor of history at the College policy blunders led to a period of deflation. behavior and the belief that the world is of William and Mary, draws similarities Populist-based laws also extended the shaped by our often-flawed expectations of between the two crises (Nelson 2008). By downturn with increased tariffs, taxes, regu- the future. 1871, the world was focused on U.S. post- lations, and transfer payments. The contrac- Civil War reconstruction and the founding of tion lasted until 1879 in the United States From this standpoint, I believe that we are the German Empire. New financial institu- and two years later in Europe and Britain, experiencing a sluggish recovery from a tions and liberalization of incorporation laws but the economic landscape had shifted deep cyclical recession rather than secular led to a credit-fueled real estate and invest- structurally. A new superpower had stagnation. The global economy is in a ment boom in Europe. Capital flowed across emerged and the period of recessionary painful period of adjustment and rebalanc- the Atlantic Ocean to fund massive spending adjustment had laid the groundwork for the ing as unsustainable drivers of economic in the emerging U.S. economy, particularly Gilded Age and the empires of Morgan, growth give way to new ideas, new leader- the railroad industry. The beginning of the Carnegie, and Rockefeller. ship, and innovation that will lead to sus- industrial revolution along with an expan- tainable growth. As part of this transition, sion of global trade led to expectations of a Post-panic, the United States became the the locus of beneficial economic reform golden age of peace and prosperity. locus of global economic growth and trans- and global growth is shifting to the East. formed into a manufacturing and mercantile Taken together, I believe these factors place Increasing leverage, however, allowed asset powerhouse. U.S.-centric technological the global economy on the path to renewed prices and the expansion of industrial innovations fueled the subsequent industrial and long-term prosperity. capacity to move beyond what was justified revolution. The cost of goods plunged as SEPTEMBER / OCTOBER 2015 21 © 2015 Investment Management Consultants Association Inc. Reprinted with permission. All rights reserved. IWM SepOct15 Composite.indd 21 9/28/15 10:13 AM FEATURE | REFUTING SECUlar StAGNATion in The GlOBal EcONOMY productivity levels jumped, leading to better ment directly and indirectly supported Continental Europe faced a banking-led living standards for millions. Nelson (2008) automakers, homebuilders, mortgage lend- crisis and the end of a debt-fueled economic summed up the parallels between the Panic ers, banks, and renewable energy firms, bubble in many of the peripheral nations. of 1873 and the GFC with the following: building the largest public debt in the The eurozone countries of Portugal, Ireland, nation’s history. The primary macroeco- Italy, Greece, and Spain began unsustainable In the end, the Panic of 1873 demon- nomic effect was to maintain a large spending binges fueled by low interest rates strated that the center of gravity had amount of inefficient capacity that delayed but without accompanying levels of produc- shifted west—from Central Europe to the a recovery in wages, business investment, tivity necessary to support their economies. United States. The current panic [the crisis and real consumer spending. These actions These sharp economic, political, and funda- of 2008–2009] suggests a further shift— may have softened the post-crisis recession mental differences within Europe delayed from the United States to China and India. but they also resulted in an extended and shaped government response to the period of sluggish growth. Economists, crisis. In coordination with the European 1873 Redux: The Global among them James K. Galbraith in his Central Bank (ECB), the weakest countries Financial Crisis 2014 book The End of Normal, generally were placed on a path of sharply reduced The resemblance of this period of boom, view this below-trend recovery pace as fiscal and current account deficits. The bust, and painful transformation to the structural in nature. Galbraith, former region’s financial institutions were required post-GFC world is startling. Excessive opti- Treasury Secretary Lawrence Summers, to significantly increase capital adequacy, mism and use of new credit instruments and economist Paul Krugman among which had the effect of shrinking lending fueled speculative bubbles in technology, others, contend that a combination of past capacity. The initial impact of these policies real estate, and commodity investment over excesses, policy errors, demographics, lag- was painful as unemployment rose and the 20 years pre-GFC. The United States ging innovation, and productivity will lead growth remained depressed, causing the played the role of 1870s Europe in leading to a period of secular stagnation. public to push back against austerity. The the financing of these booms as China ECB at first maintained too-tight a mone- played the role of the emerging superpower Policy Responses and Risks tary policy given the conditions, then that shifts global competitive dynamics. To avoid such stagnation, the U.S. Federal embarked on a powerful program of quanti- Belief in the super cycle of never-ending Reserve lowered interest rates to effectively tative easing by the end of 2014. developed-country demand for goods zero and began a program using the uncon- resulted in a massive oversupply of tradable ventional tool of quantitative easing (QE), Japan, suffering from nearly 20 years of slug- goods and commodities. Monetary and where the central bank buys up govern- gish growth, had few policy options given political blunders extended the duration of ment and/or other securities to lower inter- already-high public debt and near-zero the downturn. Nevertheless, this is also a est rates and increase the money supply. interest rates. After the election of Prime period of rebalancing and transition from This policy mix was adopted eventually by Minister Shinzo Abe to a second term in unsustainable to sustainable drivers of the central banks of Europe, Japan, and the December 2012, the government believed global growth. United Kingdom and led to weakness in that the country’s problems were structural the respective non-dollar currencies. The in nature and sought to change the behavior After a crisis, market dynamics relentlessly effectiveness of QE in boosting the real of institutions, companies, and society. shift capital from weak to strong hands as economy has been mixed; the suppression Businesses were incentivized to increase consumers and companies with adequate of interest rates led to a rise in financial profitability and growth. The Bank of Japan liquidity benefit from cheaper tradable asset prices. Central-bank policy supported shifted from a policy of high real rates that goods and productive asset prices. The bad debtors at the expense of savers and helped accepted deflation and a strong yen to a actors tend to retain significant political shift the burden of excessive leverage to the massive program of qualitative and quantita- and social power; they resist the process public sector. tive easing that explicitly supports an expan- and receive bailouts and other benefits sion of fiscal stimulus. With this the “three from targeted expansionary government China reacted to the global financial crisis arrows” of monetary, fiscal, and structural programs. The British fell into this trap with a massive program of government support for economic growth came to define during the 1873 recession and substantially spending on public infrastructure such the program called “Abenomics.” lagged the worldwide recovery well into as housing, roads, dams, schools, and the 1890s.
Load more

Recommended publications
  • Evidence from the Panic of 1873
    Banks, Insider Connections, and Industrialization in New England: Evidence from the Panic of 1873 Eric Hilt Wellesley College and NBER Abstract: Using newly collected data from Massachusetts, this paper documents the extent of bank director representation non-financial firms’ boards, and investigates whether bank-affiliated companies fared better during the recession that followed the Panic of 1873. Around 59 percent of all non-financial corporations had at least one bank director on their boards. These firms survived the recession of the 1870s at higher rates, and among the surviving firms, those with bank affiliations saw their growth rates and credit ratings decline less than firms without bank affiliations. Consistent with banker-directors helping to resolve problems related to asymmetric information, these effects were strongest among younger firms, and those with lower shares of fixed assets on their balance sheets. In contrast, the presence of bank cashiers on firms’ boards, which created an association with a bank without significantly increasing the likelihood of a credit relationship, had no effect. These results imply that during New England’s industrialization, affiliations with commercial banks helped nonfinancial corporations survive economic downturns. Email [email protected]. I would like to thank Katharine Liang, Paige Kirby, Chloe Peters, and June Wang for research assistance. 1 1. Introduction The contribution of commercial banks to the development of the American economy remains an unsettled issue. Although some have argued that America’s early financial development stimulated its industrialization (Rousseau and Sylla, 2005), part of that financial development may have been undertaken in anticipation of the economic growth that followed.
    [Show full text]
  • W O R K I N G P a P
    working paper 10 09 Banking and Financial Crises in United States History: What Guidance Can History Offer Policymakers? by Ellis W. Tallman and Elmus R. Wicker FEDERAL RESERVE BANK OF CLEVELAND Working papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded offi cial Federal Reserve Bank of Cleveland publications. The views stated herein are those of the authors and are not necessarily those of the Federal Reserve Bank of Cleveland or of the Board of Governors of the Federal Reserve System. Working papers are now available electronically through the Cleveland Fed’s site on the World Wide Web: www.clevelandfed.org/research. Working Paper 10-09 July 2010 Banking and Financial Crises in United States History: What Guidance Can History Offer Policymakers? by Ellis W. Tallman and Elmus R. Wicker This paper assesses the validity of comparisons between the current fi nancial 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.
    [Show full text]
  • The History and Remedy of Financial Crises and Bank Failures
    The author Michael Schemmann Michael Sche is a professional banker, certified public accountant, and university professor of accounting and finance. The book reviews a long litany of financial crises and bank failures since the 3rd century right up to the ongoing Global Financial Crisis. The author analyzes the financial statement mmann of a large international commercial bank in Frankfurt, Germany, and concludes that IFRS accounting principles and standards are not followed but violated, rendering the statements rather false and misleading. The book contains a remedy to end the Global Financial Crisis and prevent future crises, calling on the European Central Bank to step in and take over the role of money Money creator which is currently done by the private commercial banks, and allow governments to buy-back their general Breakdown and government debt theld by the banks, thereby reducing the MON outstanding sovereign debt of the euro area by 32% while improving the banks' liquidity sevenfold in a way that is Breakthrough completely inflation-neutral (sterile). The misconceived EY austerity programs 'to save the euro' can then be rolled back and abandoned. Br iicpa eak do The History and Remedy IICPA Publications wn and Br 1st Edition - 31 October 2013 of Financial Crises and ISBN 978-1492920595 eak Bank Failures thr ough IICPA PUBLICATIONS Money. Breakdown and Breakthrough. The History and Modern states gave control of monetary policy and markets to the Remedy of Financial Crises and Bank Failures. (1st Edition.) barons of global finance. The experiment has resulted in the same By Michael Schemmann disastrous outcomes as before.
    [Show full text]
  • History2+Economics
    COMPUTER HISTORY and U.S. ECONOMIC CYCLES J. Wunderlich PhD, Created January, 2009; Updated January 11, 2019 On Oct 9, 2008, the DOW and NASDAQ sank to alarming lows (8,579.19 and 1,645.12) with the DOW dropping over 5000 points (from ~14,100) in one year despite urgent US government lowering of interest rates AND a 700 billion dollar bail-out plan to attempt to solve a credit crisis created by poor lending practices (primarily in Real Estate). Three months later the DOW and NASDAQ had not significantly changed despite even more bail-out money given to automobile manufacturers, and additional lowering of interest rates. This triggered what was termed “The Great Recession.” In 2018 the economy had almost fully recovered, with stock markets at all time highs with the exception of a typical “Correction” in February 2018 (overdue since 2013) Let’s frame this in a context relevant to our high-tech careers …….. Computer History Much of the following is from sources no longer available online: http://209.85.165.104/search?q=cache:t4gXKDRo518J:timelines.ws/subjects/Computer.HTML+%22history+of+the+personal+computer%22+powerpc+intel+motorola&hl=en&ct=clnk&cd=9&gl=us http://www.timelinesdb.com PRE -1900 History of the modern computer begins with two technologies - automated calculation and programmability. Early mechanical calculating devices included the abacus (2700–2300 BC), the slide rule (1600’s) ..... In 1837, Charles Babbage was first design a fully programmable mechanical computer "The Analytical Engine". 1914 Thomas J. Watson Sr. began the Computing-Tabulating-Recording Co., a predecessor to IBM.
    [Show full text]
  • A Historical Overview of Financial Crises in the United States
    POZNAŃ UNIVERSITY OF ECONOMICS REVIEW Volume 11 Number 1 2011 Yochanan SHACHMUROVE Department of Economics, Th e City College of New York A historical overview of fi nancial crises in the United States Abstract: One of the few constants since the United States declared its independence is the presence of frequent fi nancial crises with similar causes. In the nineteenth century, these panics were frequent with eight occurring over the century. However, following the Second World War there was a period of relative calm, which may have led to complacency. Th e Savings and Loans and the current fi nancial crises have shown that these events remain a very real threat to economic stability. I have greatly benefi tted from research assistance by Zach Winston from Pennsylvania State University and Gregory Kauff man from the University of Pennsylvania. Keywords: fi nancial crises, economic booms and busts, housing prices, banking panics, bank runs, panic of 1857, panic of 1873, panic of 1893, banking regulations, government debt, fi scal and monetary policies, bankruptcy, fi nancial institutions, gold standard, gold- silver bi-metallic standard, the Great Depression, Dow Jones industrial average, Glass- Steagall Act, Bear Stearns, Lehman Brothers, J.P. Morgan, Dodd-Frank Wall Street Reform and Consumer Protection Act: Volcker Rule, United States, United Kingdom, Poland. JEL codes: B0, E0, E3, E4, E5, E6, F0, F3, F4, G01, G1, G2, H5, H6, N1, N2, P1. Introduction Critics have long maintained that fi nancial crises, booms and busts are an inher- ent part of the capitalist system. Th e current fi nancial crisis that began in 2007 has reignited the debate about the causes and consequences of previous economic downturns.
    [Show full text]
  • The Origins of Banking Panics: Models, Facts, and Bank Regulation
    This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: Financial Markets and Financial Crises Volume Author/Editor: R. Glenn Hubbard, editor Volume Publisher: University of Chicago Press Volume ISBN: 0-226-35588-8 Volume URL: http://www.nber.org/books/glen91-1 Conference Date: March 22-24,1990 Publication Date: January 1991 Chapter Title: The Origins of Banking Panics: Models, Facts, and Bank Regulation Chapter Author: Charles W. Calomiris, Gary Gorton Chapter URL: http://www.nber.org/chapters/c11484 Chapter pages in book: (p. 109 - 174) The Origins of Banking Panics: Models, Facts, and Bank Regulation Charles W. Calomiris and Gary Gorton 4.1 Introduction The history of U.S. banking regulation can be written largely as a history of government and private responses to banking panics. Implicitly or explic- itly, each regulatory response to a crisis presumed a "model" of the origins of banking panics. The development of private bank clearing houses, the found- ing of the Federal Reserve System, the creation of the Federal Deposit Insur- ance Corporation, the separation of commercial and investment banking by the Glass-Steagall Act, and laws governing branch banking all reflect beliefs about the factors that contribute to the instability of the banking system. Deposit insurance and bank regulation were ultimately successful in pre- venting banking panics, but it has recently become apparent that this success was not without costs. The demise of the Federal Savings and Loan Insurance Corporation and state-sponsored thrift insurance funds and the declining com- petitiveness of U.S.
    [Show full text]
  • A Brief History of Financial Crises in the United States: 1900 – Present
    A Brief History of Financial Crises in the United States: 1900 - Present Chris Bumstead Noah Kwicklis Cornell University Presentation to ECON 4905: Financial Fragility and the Macroeconomy February 17, 2016 Timeline of Financial Crises ´ Panic of 1837 ´ Early 1980s Recession ´ Panic of 1857 ´ 1983 Israel Bank Stock Crisis ´ Panic of 1873 ´ 1989-91 U.S. Savings and Loans Crisis ´ Panic of 1884 ´ 1990 Japanese Asset Price Bubble ´ Panic of 1893 ´ Early 1990s Recession ´ Panic of 1896 ´ 1994 Economic Crisis in Mexico ´ Panic of 1901 ´ 1997 Asian Financial Crisis ´ Panic of 1907 ´ 1998 Russian Financial Crisis ´ Wall Street Crash of 1929 and the Great ´ 1999 Argentine Economic Crisis Depression ´ Late 1990s and Early 2000s Dot-Com Bubble ´ 1970s Energy Crisis ´ 2007-2008 Financial Crisis ´ 1980s Latin American Debt Crisis ´ 2010 European Sovereign Debt Crisis What is a Financial Crisis? ´(Claessens and Kose 2013): “extreme manifestations of the interactions between the financial sector and the real economy” (4) ´ Currency ´ Current and Capital Accounts ´ Debt (Sovereign) ´ Banking ´ Crashes interact with Equities and Mortgage Markets The Long View The Crisis and Panic of 1907 ´ Crisis: The beginning of a downturn and businesses contract and the prices of commodities and securities decline (Johnson 454) ´ Panic: When the country’s credit system breaks and confidence shifts. (Johnson 454) ´ The Crisis began in January of 1907 and the Panic began in October of 1907 (Johnson 455). ´ Crisis = world event (in countries who used the Gold Standard) (Johnson 455) Panic of 1907 Continued ´ Gold supply 1890-1907: 4,000,000 à 7,000,000 (Johnson 455) ´ Bank Deposits 1890-1907: 6,000,000 à 19,000,000 (Johnson 455) ´ Prices of commodities for Gold Standard countries rose 40% from 1897 to 1907 (Johnson 455) ´ Stock Market reached a low in March of 1907 after an upwards rise leading up to the beginning of 1907 (Johnson 455-456) ´ U.S.
    [Show full text]
  • Download Download
    Volume 9 Issue 2 (2020) Research Article An Overview of the Evolution of Modern Macroeconomic Theories Zijian Liang1 and Michael Silber2 1St. George's School, Vancouver, Canada 2Seoul International School, South Korea ABSTRACT This paper examines the evolution of macroeconomic theories from the 18th century to present. The manuscript starts off on giving a short analysis on the Great Depression and how it sparked numerous changes in macroeconomic policies. Then, the Classical Economic Theory is introduced and its shortcomings are examined through the Panic of 1873. Next, the paper's focus will shift to a deeper analysis on the causes, impacts, and the recovery of the Great Depression and the effects it had on the United States economy. Keynesianism and the benefits of fiscal policy are introduced and reasons for the rejection of the Classical Economic theory are explained. William Phillips' Phillips Curve is then introduced and connections between Phillips' theory and Keynes' theory are made. Lastly, the paper will examine the effects of monetary policy in the 1970s and the recent Great Recession of 2008. Most importantly, the reasons modern economists like Friedman oppose fiscal policy and Keynesianism are interpreted. From the works of these economists, the central argument of the paper advocates for the fact that we can no longer rely on the Classical Economic theory during times of economic crisis. The modern economy should be observing both Keynesianism and Monetarism; we should be pursuing expansionary fiscal policy during times of downturns and contractionary mone- tary policy during times of economic boom. Introduction In the 1930s, the world suffered from the worst economic downturn in history known as the Great Depression.
    [Show full text]
  • The Depression of 1929 Is the Wrong Model for the Current Economic Crisis
    Case Study: Finding an analog year to help understand the present. The Panic of 1873 compared to 2008 This article first appeared in the Chronicle of Higher Education on October 17, 2008. It appeared online on October 1, 2008 The Real Great Depression The depression of 1929 is the wrong model for the current economic crisis As a historian who works on the 19th century, I have been reading my newspaper with a considerable sense of dread. While many commentators on the recent mortgage and banking crisis have drawn parallels to the Great Depression of 1929, that comparison is not particularly apt. Two years ago, I began research on the Panic of 1873, an event of some interest to my colleagues in American business and labor history but probably unknown to everyone else. But as I turn the crank on the microfilm reader, I have been hearing weird echoes of recent events. When commentators invoke 1929, I am dubious. According to most historians and economists, that depression had more to do with overlarge factory inventories, a stock- market crash, and Germany's inability to pay back war debts, which then led to continuing strain on British gold reserves. None of those factors is really an issue now. Contemporary industries have very sensitive controls for trimming production as consumption declines; our current stock-market dip followed bank problems that emerged more than a year ago; and there are no serious international problems with gold reserves, simply because banks no longer peg their lending to them. In fact, the current economic woes look a lot like what my 96-year-old grandmother still calls "the real Great Depression." She pinched pennies in the 1930s, but she says that times were not nearly so bad as the depression her grandparents went through.
    [Show full text]
  • William Graham Sumner: Monetary Theorist
    WILLIAM GRAHAM SUMNER: MONETARY THEORIST H.A. SCOTT TRASK he pioneering sociologist William Graham Sumner (1840–1910) was a prolific and astute historian of the early American republic, whose Twork was informed by his classical liberalism and his understanding of economics. He authored seven major works including biographies and the- matic studies concentrating on the vital subjects of currency, banking, busi- ness cycles, foreign trade, protectionism, and politics. Although his works are out of print, and hardly mentioned or referred to by historians or economists, they are quite valuable for understanding the politics and major economic issues of the first century of the republic.1 They are: History of American Cur- rency (1874), Lectures on the History of Protection (1877), Andrew Jackson (1882), Alexander Hamilton (1890), The Financier and Finances of the Amer- ican Revolution, 2 vols. (1891), Robert Morris (1892), History of Banking in the United States (1896). As one can see, Sumner was most interested in the history of money and banking in America. He was a resolute opponent of inflation, inconvertible currencies, legal tender laws, bimetallic standards, and the American practice of fractional-reserve banking. His theory of the business cycle was built on the work of antebellum political economists such as Condy Raguet. Sumner’s understanding of it is sophisticated and proto- Austrian. SUMNER’S EPISTEMOLOGY Sumner’s historical work laid the basis for his understanding of economics, politics, and sociology. Unlike Mises and Rothbard who believed economic SCOTT TRASK is an independent historian living in St. Louis. 1One of the few studies of Sumner’s economic thought is Dominick Armentano’s 1966 doctoral dissertation, “The Political Economy of William Graham Sumner: A Study in the History of Free Enterprise Ideas.” However, he devotes only 11 pages to Sumner’s money and banking views, and his discussion of Sumner’s understanding of the business cycle is quite superficial.
    [Show full text]
  • UC Berkeley Fisher Center Working Papers
    UC Berkeley Fisher Center Working Papers Title Crashes, Contagion, Cygnus, and Complexities: Global Economic Crises and Real Estate Permalink https://escholarship.org/uc/item/5x15d7dk Authors Edelstein, Robert H. Edelstein, Michael D. Publication Date 2014-06-01 eScholarship.org Powered by the California Digital Library University of California Crashes, Contagion, Cygnus, and Complexities: Global Economic Crises and Real Estate Michael D. Edelstein and Robert H. Edelstein Fisher Center for Real Estate and Urban Economics Haas School of Business, University of California Berkeley June 2014 INTRODUCTION Globalization has changed the world in many ways. Real and financial markets have become irreversibly integrated. This has had a major impact upon the pricing and production of global and local assets, including real estate. Moreover, burgeoning real estate lending and securitization have been a major facilitator for the globalization of financial markets over the past two decades, and have spawned intense international economic and financial cross border activity. During the recent Global Financial Crisis of 2007-2008, many observers claimed that globalization and economic-financial integration intensified and exacerbated contagion effects.1 The historical record may suggest otherwise. The objective of this paper is to demonstrate that in past economic recessions contagion has been not only prevalent, but also a severe, powerful, and virulent force. Economic and financial crises in large countries have a long record of causing contagion that frequently evolves into larger and more devastating crises that wreak economic havoc upon other parts of the world. It is more surprising, in fact, that such historically discernable contagion effects seem to be subject to collective amnesia.
    [Show full text]
  • PIER Working Paper 11-006
    Penn Institute for Economic Research Department of Economics University of Pennsylvania 3718 Locust Walk Philadelphia, PA 19104-6297 [email protected] http://economics.sas.upenn.edu/pier PIER Working Paper 11-006 “Reoccurring Financial Crises in the United States” by Yochanan Shachmurove http://ssrn.com/abstract=1777263 Reoccurring Financial Crises in the United States By Yochanan Shachmurove Department of Economics The City College of The City University of New York, and Department of Economics The University of Pennsylvania Summer 2010 Abstract The economic history of the United States is riddled with financial crises and banking panics. During the nineteenth-century, eight major such episodes occurred. In the period following World War II, some believed that these crises would no longer happen, and that the U.S. had reached a time of everlasting financial stability and sustainable growth. The Savings and Loans Crisis of the 1980s, the 2001 dot-com bust and the 2007 housing bubble that led to the current global financial crises demonstrate that these phenomena are still reoccurring. Regulators and policy makers should keep aware of the recurrence of such crises. JEL Classification: E0, E3, E44, E5, E6, N0, N1, N2, G0, G18, G38 Keywords: Financial Crises; Financial Regulations and Reforms; Banking Panics; Banking Runs; Nineteenth and Twentieth Century Crises; Bankruptcies; Federal Reserve Bank; Subprime Mortgage; Troubled Asset Relief Program (TARP); Collateralized Debt Obligations (CDO); Mortgage Backed Securities (MBO); Glass-Steagall Act; J.P. Morgan Chase; Bear Stearns; Augustus Heinze; Timothy Geithner; Paul Volcker. Please address all correspondence to: Professor Yochanan Shachmurove, Department of Economics, University of Pennsylvania, 3718 Locust Walk, Philadelphia, PA 19104-6297.
    [Show full text]