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Another similarity with the pre period is the determination of central banks to increase borrowing costs. The speeches of central bank officials are littered with references to the need for higher rates, both to bring discipline back to borrowing and, in case another credit squeeze grips the banking sector, to have the tools to prevent a full-blown economic collapse. Bank of England governor Mark Carney has said as much , though his remarks are tempered by threats of a no-deal Brexit.

The Swedish central bank, the Riksbank, recently increased interest rates and signalled that it planned to continue on that path now that companies were reporting the largest labour shortages since Threadneedle Street has already raised its base rate from 0. The Fed is even further ahead, having pushed rates to a level of 2. Jacking up rates to calm soaring economic growth — at least the kind of growth that can lead to inflation — is straight out of the textbooks. With only small or non-existent increases in wages above inflation, households might opt for more borrowing, or dip further into their savings to maintain consumption.

Recent evidence shows they are doing neither. They did the same in the years before , when property prices began to stagnate as buyers reached their borrowing limits and car sales slowed.

Brazil: the debt dilemma

The reason the crisis was so scary, potentially catastrophic in the eurozone, was because a lot of the assets these banks were holding were piss poor loans and unsustainable debt in the property asset bubbles in the periphery countries, and the banks had become heavily dependent on keeping their operations afloat by over-night money from the repo markets backed by eurozone government bonds.

In first the over night repo credits markets seized up strangling the banks source of liquidity, then large numbers of loans made to the peripheral property markets turned into worthless bad debts, and then the value of the eurozone government bonds held by the banks as financial reserves collapsed in value. Its was triple whammy and in a short space of time numerous banks, including some very big one, found themselves in very serious trouble.

Under the Basil regulatory system banks have to keep a certain proportion of their capital as so called tier-one capital, that is in the form of rock solid and highly liquid assets. This tier-one capital could, under the Basil rules operating at the time, be as little as 2 per-cent of a banks assets. Given the size of the banks in relation to the GDP of their various host national economies its easy to see that they were already too big to bail.

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They were so big that if they went bust they could take down the entire host national economy. Although an important reasons that the was so damaging was that the largest banks had become disproportionately huge in relation to their host economies the weight of banks within the host economies was different for the US compared to the various European host economies. Europe is the most financialised region on earth. Each of the biggest European banks has enough debts on its own to match or exceed the host countries annual GDP.

If you take the combined assets of the top six US banks in the third quarter of and add them together, it comes to just over 61 percent of US GDP. Any one of these banks, on average, could then claim to impact about 10 percent of US GDP if it failed. Add the risk of contagion, that one giant bank collapsing might bring down others, and you have what the US authorities saw as a too big to fail problem. When the US authorities did actually let the giant financial firm Lehman Brothers go bust in it triggered a wave of panic and bank failures, and was seen retrospectively as having been a huge mistake.

Although some eurozone banks failed in most of the immediate post Lehman Brothers damage happened in the anglo saxon financial system, in New York and London, and things in the eurozone seemed better. However the scale of financialisation was much bigger in Europe than in the US. Remember that there was no unified system of European banking system regulation and support, no EU-wide deposit-guarantee scheme, no EU-wide bailout mechanism for banks, so the costs of supporting banks that went bust in the eurozone would all fall on the national governments.

This means that the measure of financialisation, the amount of risk posed by the size of individual banks, must be calculated by reference to the size of national host economies. It is the the proportionate weight of the big banks in the host economies that is the key risk factor. In the fourth quarter of the result of calculating the size of banks in the various European national economies, and therefore the risks posed by their failure, was pretty scary.

Compared to the US the European banks posed a much, much bigger risk to the various European host economies. Deutsche Bank alone had an asset footprint of over 80 percent of German GDP and runs an operational leverage of around 40 to 1. The top three Italian banks constitute percent of GDP. Having been faced with, and only just avoided, the very real threat of a disastrous cascading collapse of the entire financial system, which would have led to a giant debt deflation depression, Europe moved to reform the banking system to ensure that the danger of an existential banking crisis could be avoided in future.

It also proposed that banks retain higher capital and loss absorbing reserves than was currently required under the Basel rules. Many of the recommendations of Vickers and of the Parliamentary Commission on banking standards were given effect by provisions in the Financial Services Banking Reform Act It was a similar story in the eurozone. On 29 January , the European Commission adopted a proposal for a regulation to stop the biggest banks from engaging in the risky activity of proprietary trading. The explicit intention of the the various European post crisis reforms and the new regulations was to rein back the scale of European investment banking to a more supportable level.

The main concern has been that a medium-sized European country such as the UK or Switzerland or even a larger country like Germany, let alone a tiny country like Iceland or Ireland, would find a global investment bank to be too large and too dangerous to support, should it get into trouble. The problem Europe faces is that so long as it is a collection of dispirit states, each of which might have to theoretically carry the costs of baling out a very large bank that it happens to host, the size of European banks have to be constrained for reasons of prudence. The EU, of course, has a much larger scale than its individual member countries, its combined economy is larger than that of the US.

But it does not have sufficient fiscal competence, financial integration or a working system of pooled risk. Related fields. Econometrics Economic statistics Monetary economics Development economics International economics. Edward C. Sargent Paul Krugman N. Gregory Mankiw. See also. Macroeconomic model Publications in macroeconomics Economics Applied Microeconomics Political economy Mathematical economics. Main article: Bank run.

Main articles: Stock market crash and Bubble economics.


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Main articles: Currency crisis and Sovereign default. Main articles: Recession and Depression economics. Main articles: Strategic complementarity and Self-fulfilling prophecy. Main article: Leverage finance. Main article: Asset-liability mismatch. Main articles: Economic psychology and Herd behavior.

Main articles: Financial regulation and Bank regulation. Main articles: Financial contagion and Systemic risk. Main article: Austrian business cycle theory. Main article: Crisis Marxian. Main article: Coordination game. Main articles: Herd behavior and Adaptive expectations. See also: List of banking crises and List of economic crises. Money portal Banks portal. The Journal of Economic Perspectives. Archived from the original on 2 October Retrieved 20 July Bill Moyers Journal.

Episode Wall Street Journal. Archived from the original on 13 August Retrieved 13 July It's now conventional wisdom that a housing bubble has burst. In fact, there were two bubbles, a housing bubble and a financing bubble. Each fueled the other, but they didn't follow the same course. Real estate and the financial crisis: how turmoil in the capital markets is restructuring real estate finance. Real Estate Issues. New York: Harcourt Brace and Co.


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    Journal of Political Economy 93, pp. Cooper and A. John , 'Coordinating coordination failures in Keynesian models. See especially Propositions 1 and 3. Diamond and P. Dybvig , 'Bank runs, deposit insurance, and liquidity'. Journal of Political Economy 91 3 , pp. Obstfeld , 'Models of currency crises with self-fulfilling features'. European Economic Review 40 3—5 , pp. New York: Palgrave Macmillan. Cooper , Coordination Games. Cambridge: Cambridge University Press.

    Krugman , 'A model of balance-of-payments crises'. Journal of Money, Credit, and Banking 11, pp. Morris and H.

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    Shin , 'Unique equilibrium in a model of self-fulfilling currency attacks'. American Economic Review 88 3 , pp. Banerjee , 'A simple model of herd behavior'. Bikhchandani, D. Hirshleifer, and I. Welch ,'A theory of fads, fashions, custom, and cultural change as informational cascades'.

    Chari and P. Kehoe , 'Financial crises as herds: overturning the critiques'. Avery and P. Cipriani and A. Journal of Theoretical Economics" 8 1 Contributions , Article 24, pp. Archived from the original on 29 December Retrieved 26 August Rogoff and his longtime collaborator Carmen Reinhart, at the University of Maryland, probably know more about the history of financial crises than anyone alive. The Economist. Retrieved 16 October Financial crises. Crisis of the Third Century CE — Great Bullion Famine c.