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Good clean fun

Steve Quinn, Associate Professor of Economics, Texas Christian University, proposes an analogy of today’s problems to those of a century ago, via WSJ:

The crisis of 1907 as an apt analogy to the current situation.

1. In 1907, trusts had developed to circumvent the regulatory restrictions on banks. In this, trusts paralleled hedge funds.

2. When panic hit, no one knew where the risk was, so a general credit crunch followed. As today, live by asymmetric information, die by asymmetric information.

3. The trusts outside the lender of last resort system of 1907 (clearinghouses) had a terrible time of it. Today hedge funds are outside the Federal Reserve System.

4. The crisis subsided after J.P. Morgan felt sure enough to step in with his own capital. Bank of America jumping into Countrywide is similar.

5. The 1907 crisis scared enough people to generate substantial new regulatory initiatives. At first, the old system of emergency lending was extended in the Aldrich-Vreeland Act. Later, the Federal Reserve was created to replace the clearinghouse system and separate the supply of ultimate reserves from banks. The parallel here is extending Fed discounting to instruments like CDOs and institutions like hedge funds.

6. Finally, how can one resist the 100 year gap?

Our analogy has been 1926-1927, but Quinn’s story ends better.

This entry was posted on Friday, August 31st, 2007 at 6:50 am and is filed under business, General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

One Response to “Good clean fun”

  1. gs Says:
    September 1st, 2007 at 10:37 am

    And a happy Labor Day weekend to you too, Jack! ;-)

    Dinocrat: Steve Quinn, Associate Professor of Economics, Texas Christian University, proposes an analogy of today’s problems to those of a century ago… Let’s pursue that analogy. According to the Minneapolis Fed,

    At the turn of the century the banking industry felt threatened by the new trust companies (and their young, wealthy financiers) and decided to sway public and congressional opinion by making an example of a trust company…If Knickerbocker Trust would falter, then Congress and the public would lose faith in all trust companies and banks would stand to gain, the bankers reasoned.

    1907 banks : trusts :: 2007 money centers : hedge funds?

    A NY Times subsidiary trumpets (HT: Quinn’s comments):

    Calls grow louder for international overview of U.S. markets

    Unfortunately the Bush administration’s “strong dollar” has ceded influence to the furriners.

    Prof. Quinn specializes in economic history and has held visiting positions at the Atlanta Fed and the Bank of England. To reverse Mark Twain’s saying, history rhymes but it does not repeat itself: presumably some of what has emerged from financial economics since 1907 has enduring validity. The physical and financial housing markets have seen serious abuses, but they also have yielded benefits:

    …over the past several decades, housing markets have become less imperfect in the sense that households are now more able to buy homes whose values are consistent with their long-term income prospects.

    The status quo is flawed, but there is a difference between a reason for improved oversight and a pretext for more regulation.

    Meanwhile, although my example of Thornburg Mortgage was less than felicitous,

    Despite the recent market turmoil, executives and directors have invested heavily in their own public companies. (p)Total insider buying in the United States reached $252 million in August, marking the highest level since 2003, according to a Financial Times. (p)The month normally averages $186 million in such trades. (p)Stock purchases by management at Standard & Poor’s 500 banks, lenders and insurance companies hit a 12-year-high, according to the report. (p)In the meantime, insider sales have fallen to $2.9 billion compared to a four-year monthly average of $4 billion.

    The 2003 insiders were proved correct in identifying the bottom of a two-year bear market.

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