7894bdb0_brary_of_Economics_and_Liberty__ast_Highlights_HIDE_HIGHLIGHTS
[Time] 41:08
Calomiris podcast: Different story: look at the 1874-1913 period, increased capital flows, globalization, and compare it to the last 30 or 40 years, which had a similar flavor, there was a much larger number of banking crises in the more recent period. Different definition: bank crisis defined as large waves of bank failures with lots of losses. In the earlier period there was a handful of crises--Argentina, Australia--where there were serious loss of net worth; Norway, Italy. In all those cases, government had distorted risk-taking by subsidizing in; and in the recent period there's been an increase of that via "too big to fail." Guarantees. Two parts: first factual, document the crises for 66 countries in the book; incidence in the earlier period was huge. The only reason the number is higher for the more recent period is that we now have more countries--shouldn't say the only reason--a reason. They were colonies back then; and some countries that didn't have a banking sector have more developed banking now. The denominator is bigger. The share of crises is still somewhat higher; but issue of guarantees is very important. If you feel that in good states of nature you will get a great return and in bad states of nature you will be bailed out, your willingness to undertake risk and to borrow is going to be importantly affected by that. Look at post-WWII crises, what is private debt before the crisis often winds up being public debt afterwards. Public debt surges in the aftermath of all of these; and in the current situation part of it is deficit spending; but a large part of it is bailout. Bailout not just in the direct sense as in TARP, but assuming assets. Measure of rising indebtedness: central government indebtedness adjusted for inflation increases by about 86% in the three years following a crisis. Conservative estimate; a lot of new guarantees are not yet realized and are not included. Right now the Fed has about a trillion dollars of Fannie and Freddie on their balance sheet, and that's not going to turn out very well; hasn't been recognized. Implicit guarantees is a very important magnifier. The kind of fast innovation, moving capital mobility through the financial system, has been associated with incidence of banking crises. The dropoff in the incidence of banking crises in the period after WWII is a pretty marked one; plotted out from 1800 through 2008. Quiet period. Part of the world had been leveled after the war. When so much has been destroyed, though, a lot of what you are rebuilding is productive stuff; low-hanging fruit is very productive.
Reinhart on Financial Crises | EconTalk | Library of Economics and Liberty