Arnold Kling  


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Hyun Song Shin writes,

My recent research suggests that the 'global banking glut' may have been more culpable for the crisis than the 'global savings glut'

I reported on his paper when I first read it (I believe Tyler Cowen spotted it for me, and Paul Krugman spotted it before that).

People can argue about whether we want to copy European countries with regard to health care policy or their long vacations or what have you. I challenge anyone to defend the European banking model, in which a few large banks dominate the financial sector and take large risks using short-term funding.

Along these lines, Morgan Ricks sneaks in a little bit of Austrian econ, bashing maturity mismatching in The New Republic.

Douglas Diamond, a University of Chicago economist and a leading theorist in this area, recently said that "financial crises are always and everywhere about short-term debt." The recent crisis was no exception. In 2008, we witnessed massive runs on virtually all of the financial sector's short-term IOUs, which go by odd names like "repo," "asset-backed commercial paper," and "Eurodollars." This time, the public sector intervened on an awesome scale to stem the panic, with trillions in cash infusions and guarantees for the financial industry.

What you have in Europe, even more than in the U.S., are banks that have grown much too large, using these dangerous leverage techniques. As bad as the European fiscal crisis may be, the state of the European banks is perhaps even more precarious. See this Tyler Durden post on the high ratio of bank debt to GDP in various European countries, including the UK.

Er, have a nice day.

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COMMENTS (5 to date)
David Beckworth writes:


I understand the point about size you make, but what about the Canadian banking system? It is a highly concentrated banking system too and not only done better recently buy historically (e.g. zero banks shut down during the Great Depression).

Nick Rowe writes:

David beat me to the Canadian question!

While I tend to agree with Arnold about banks, I don't think the *size* of banks matters much. The UK had to bail out some little banks, IIRC, because the banks were "too correlated to fail". If 100 banks are all doing exactly the same thing (and they often tend to) then it doesn't make any difference if it's one big bank doing that same thing.

Any bank is an accident waiting to happen, almost by definition of a "bank", as an entity that borrows long and lends short. Why we have banks (why not stock and bond markets?); and why banks are so tied up in the monetary system (why not write cheques on our stock and bond mutual funds?), are the questions.

Nick Rowe writes:

Ooops! I meant "borrows short and lends long". I just defined an anti-bank.

mark writes:

That's a really good post. Shin's work is consistent with that of Friedman in Engineering the Financial Crisis concerning the role of Basel II's risk weighting in steering capital to certain sectors. He also is alert to the role of European banks in the "shadow banking" sector in the US. If you recall the SEC suit against Goldman, all the buyers of the supposedly evil securitization were European, and one might have wondered, why? Of course, it is Basel II as much as anything. As well, the financial sector is a larger proportion of the Eurozone economies than in the US; the banks are much worse capitalized (blame Basel II again) and state ownership of banks is much broader.

George J. Georganas writes:

An airplane in flight is an accident waiting to happen. Riding a bicycle meann maintaining a precarious balance. There are people that are too scared to ever fly or too scared to ever ride a bicycle. Borrowing short to lend long is not really that different.

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