By John B. Taylor
The monetary quandary of 2008 devastated the yankee economic climate and brought on U.S. policymakers to reconsider their techniques to significant monetary crises. greater than 5 years have handed because the cave in of Lehman Brothers, yet questions nonetheless persist concerning the most sensible how you can steer clear of and reply to destiny monetary crises. In Across the good Divide, a copublication with Brookings establishment, contributing monetary and felony students from academia, undefined, and govt examine the monetary quandary of 2008, from its motives and results at the U.S. financial system to the best way forward. The specialist members examine postcrisis regulatory coverage reforms and rising monetary and monetary developments, together with the jobs performed via hugely accommodative financial coverage, securitization run amok, government-sponsored businesses (GSEs), huge asset bubbles, over the top leverage, and the Federal money expense, between different capability explanations. They speak about the position performed by way of the Federal Reserve and look at the...
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Extra info for Across the Great Divide. New Perspectives on the Financial Crisis
John Cochrane of the University of Chicago says that TBTF isn’t over, and we’re not prepared for the next crisis. Even if we were in a position to address a repeat of the 2008 crisis, history tells us that the next economic crisis will be different from the last one and will require a completely different response. We can, however, reframe our perspective of the 2008 crisis and think of it as a run. It’s not institutions that present risk to the financial system, but run-prone assets. While many people resist banning run-prone assets, saying that borrowing will become more expensive and banks unable to transform liquidity and maturity, Cochrane says that this is an outdated notion.
In many instances, policies adopted to address the “lessons learned” from one crisis eventually grew into regulatory blind spots and artificial market asymmetries that helped fuel the next. What then are policymakers to do? On one hand, they need to learn from the past and correct for government lapses and missteps of prior years. On the other hand, they need to do so in a way that doesn’t create new problems. Government policymakers need not be caught between the proverbial rock (those who cannot remember the past are condemned to repeat it) and a hard place (first, do no harm).
A failure of one of these banks would cut off access to tri-party repo financing, which could result in fire sales of securities. Steve Strongin of Goldman Sachs and his coauthors present an optimistic argument that focuses on the newly strengthened or newly created lines of defense against failure, rather than on the remaining resolution hurdles. Analysis of these three lines of defense—more and better capital, capital incentives for banks to recapitalize early in a stressed situation, and the debt shield—show that the US financial system is far safer today that it was in the past.
Across the Great Divide. New Perspectives on the Financial Crisis by John B. Taylor