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2014 | Buch

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Why Bank Panics Matter

Cross-Disciplinary Economic Theory

verfasst von: Frederick Betz

Verlag: Springer International Publishing

Buchreihe : SpringerBriefs in Economics

Enthalten in: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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Über dieses Buch

Bank panics have always mattered because they create serious disruptions in economic and financial activity, depressing national economies. But they matter even more now, as information and communications technologies have stitched together a global financial system that is more vulnerable to crisis on a large scale. For example, the global bank panic of 2007-08 froze up the national economies of the U.S., England, France, Iceland, Ireland, and Germany -- all at the same time. And each of their governments had to act to bail out their own banks, without a consistent international regulatory framework.

In this volume, Fred Betz takes a unique, cross-disciplinary approach to understanding bank panics, with an emphasis on the U.S. Bank Panics of 1857, 1907, 1930-33, 2007-08 and the European Bank Panics of 2010-2013. Despite over a hundred years of modern economic theory and many excellent historical studies about bank panics, they are still poorly understood and certainly not yet preventable. Partly this has been a function of the limitations of modern economic theory, which cannot interpret bank panics as complex societal phenomena. All societal phenomena are, in reality, multi-disciplinary in scope and cross-disciplinary in connections. Bank panics can best be understood through the collective lenses of sociology, political science, psychology, management science, management of technology, among other disciplines. Through this dynamic approach, the author identifies five key underlying triggers of bank panics: (1) funding excessive leverage in speculation, (2) lack of proper banking regulation, (3) bad banking practices, (4) lack of banking integrity, (5) corrupt banking practices. In so doing, he suggests new strategies for avoiding and recovering from bank panics and other financial crises.

Inhaltsverzeichnis

Frontmatter

Chapter 1. Reality and Theory

Abstract

Bank panics have long been experienced, and even extensively studied, as economic history. Yet the full explanation of panics remains contentious. Why do bank panics occur? How can recovery be made from the recessions triggered by bank panics? Can proper government policy prevent bank panics? Since the nineteenth century, these have been central questions in economics. As the historians have been cross-disciplinary in their views, many social science theoreticians have narrowly constrained their ideas within a single-discipline boundary. Disciplinary theories have partial validity in some contexts. But no disciplinary theory has complete validity in all contexts.

Frederick Betz

Chapter 2. Empirically Grounded Theory

Abstract

Suppose financial markets are not empirically “perfect.” Further suppose that “regulation” of financial markets is required for any financial market to operate toward the economic ideal of market perfection. And suppose the practice of regulation should be based upon a theory of regulation (regulatory principles) which can be empirically shown to have worked in financial history. Then what kind of regulatory theory could this be and how constructed and how verified? The goal is a cross-disciplinary theory of regulation—which can prescriptively direct financial markets toward the ideal of economic perfection. The economic ideal is for any financial market to operate with transparent financial information, rational financial behavior, effective financial performance, and integrity in economic risk. And this is a traditional idea in banking regulation.

Frederick Betz

Chapter 3. Background: Banking and Causality

Abstract

Our quest is a cross-disciplinary theory of financial regulation, grounded upon economic history. Before we proceed further on this journey, there are two backgrounds we should share. First, what is banking? Second, what is explanation? We have seen that panics occurred in banking. Why? We have argued that explaining these panics cannot be causal. Why? We review some background, first about banking and second about causality.

Frederick Betz

Chapter 4. Dynamics of Bank Panics

Abstract

We looked at the historical event of the 1857 bank panic, but what led up to it? What is the dynamic of a financial structure which creates the historical conditions for a crisis? We noted that the two schools of economics had not achieved a synthesis of their different views on an economy, which divided them. Accordingly, economic theory had not been able to explain why the panic occurred. Next we use the cross-disciplinary approach of societal dynamics to understand how the conditions for the 1857 panic had arisen in the US society. Societal dynamics theory analyzes the history of society as a sequence of “stasis” (stable infrastructures)—each altered in time by a historical event which results in a “change” from the prior infrastructure. This sequence of stasis and change is shown in Fig. 4.1.

Frederick Betz

Chapter 5. Control in an Economic System

Abstract

As we have seen in the example of the 1857 panic, bank panics occur in a common pattern. There is a price disequilibrium in a capital asset market, created by speculators’ reflexivity about future prices and their use of excessive leverage—increasing prices unto a financial bubble which grows and finally bursts. Then the banks which funded the speculation suffer bank runs, as their assets fall in the “debt deflation” from the bubble. And before 2007, this pattern had been identified in the economic writings of Fisher, Keynes, Minsky, and Soros. So why was this pattern a surprise again in 2007?

Frederick Betz

Chapter 6. The Great Depression

Abstract

As Ben Bernanke (Chair of the US Federal Reserve System in 2012) commented: To understand the great depression is the Holy Grail of macroeconomics. Not only did the Depression give birth to macroeconomics as a distinct field of study, but also—to an extent that is not always fully appreciated—the experience of the 1930s continues to influence macroeconomists’ beliefs, policy recommendations, and research agendas.” (Bernanke 1995)

Frederick Betz

Chapter 7. Topological Economic Theory

Abstract

We recall that one of the problems with banking regulation has been its post-facto rather than preemptive mode—fixing bank panics after they occur rather than preventing them. And we recall that this was particularly true of the 2007 global bank panic. Binyamin Appelbaum wrote: “The Fed (Federal Reserve System) began 2007 still deeply immersed in complacent disregard for problems in the housing market. Fed officials knew that people were losing their homes. They knew that subprime lenders were blinking out of business with every passing week. But they did not understand the implications for the broader economy… August 2007 was the month that the Fed began its long transformation from somnolence to activism.” (Appelbaum 2013)

Frederick Betz

Chapter 8. Financial Layering

Abstract

As we have seen, the endogenous school had focused upon financial systems, not only as processes but also as institutions. In 2012, Charles J. Whalen saw these two foci about financial systems as converging: “In the mid-1970s, Wallace C. Peterson…argued that institutionalism and the economics of John Maynard Keynes can be viewed as ‘two trains on parallel tracks toward a common destination’. Today, in the wake of the Great Recession (2007) —the worst global economic downturn since the 1930s—those trains have finally reached the station. Their arrival is none too soon for economics and the world economy. The common destination of institutionalism and the economics of Keynes, the latter of which is currently called Post-Keynesian economics, is Post-Keynesian Institutionalism (PKI).” (Whalen 2012)

Frederick Betz

Chapter 9. Public Good and Private Good

Abstract

Regulation is a topic which has been studied in several social science disciplines. It has long been a topic in economic theory, addressed under economic concept as “public good.” Regulation has also been studied as a subfield of sociology as the sociology of law. Regulation has also been studied in the interdisciplinary social science area of “political economy.” In all views, there is agreement that formally “regulation” is enacted legislation which is administered to constrain rights and allocate responsibilities by participants in a societal order which is being regulated. In the topic of “administrative law,” the term “rule-making” is used to characterize the process in which legislative and executive bodies create and implement rules of the game. Legislature sets broad policy mandates by passing laws, and then executive agencies create and implement detailed regulations. (See, e.g., Hall 2009.) In the USA, enacted on June 11, 1946, the Administrative Procedure Act (Public Law 79-404, 60 Statute 237) established how administrative agencies of the federal government may propose and establish regulations and how federal courts may review agency regulatory decisions (Administrative Procedure Act 1946).

Frederick Betz

Chapter 10. Casino Banking

Abstract

After the year of 2008 and its frightening global experience of inappropriate financial use of “technology” and bad “banking practice” and foolish “deregulation,” then the world’s banking system straightened up, didn't it? There were no more occurrences of bank “fragility” in the world. And this would be the happy ending to the world’s banking problem. Right?

Frederick Betz

Chapter 11. Why Banks Panic

Abstract

As we have seen, there is no single cause of a bank panic; instead there are several factors which set the stage for bank depositors to panic about a bank and withdraw savings en masse, starting a bank panic. In general, what are the principal reasons for bank panics? We can now compare the set of historical cases, which we have been studying: US bank panics of 1857, 1907, 1930–1933, and 2007–2008 and Greek Cyprus bank panic of 2013. In this comparison we will see at least five main ways in which banks set themselves up for a potential panic: (1) funding excessive leverage in speculation, (2) lack of proper banking regulation, (3) bad banking practices, (4) lack of banking integrity, and (5) corrupt banking.

Frederick Betz

Backmatter

Titel: Why Bank Panics Matter
verfasst von: Frederick Betz
Verlag: Springer International Publishing
Electronic ISBN: 978-3-319-01757-0
Print ISBN: 978-3-319-01756-3
DOI: https://doi.org/10.1007/978-3-319-01757-0