Newsflash: bank runs can actually happen in market economies and when they do, they do real economic damage. Yup! Economists proved this to their satisfaction in the ‘80s. Not the 1880s, but the 1980s. That was the moment when three intellectual pioneers found a way of fitting banks and bank failures into a workhorse economic model and specified a channel by which the failure of banks raised the cost of credit intermediation. And that matters because, “as we all know”, intermediating between savers and borrowers is what banks do.
I wait with bated breath for economists to discover the wheel and fire. They might even one day even advance so far as to discover time and distance but for that I will not be holding my breath.
Economists have this strange idea that mathematical rigor is the signature of science but I have some bad news for them: It ain't. Economics suffers from a bad case of physics envy.
A couple of key elements driving the borrowers’ move to marketable securities from bank loans are not mentioned: loan covenants and bank regulation. Bank loans have traditionally had more covenants and a loan officer butting in on the borrower’s business. Borrowers hate that. And bank regulation almost by definition means that in many cases the borrower can’t use a bank.
Finally, without wanting to be nasty, marketable securities brought investment banks onto the playing field and their almost risk free ability to profit from placing securities left commercial banks, literally, holding the bag…empty.
Thank you for this wonderfully clarifying piece. I’m a lawyer, not an economist, but have tried to stay relatively informed on these issues, perhaps because my early career in the Midwest coincided with the Volcker shocks, and I was deeply impressed--or depressed--by the industrial wreckage that surrounded me in the aftermath.
Upon reading the Nobel citation the other day, I asked myself, “Why did anybody need to demonstrate in the ‘80s that bank runs could happen, when they’ve been happening in broad daylight for centuries?”
Thank you for the link. I am familiar with the counter-arguments of the economists but it still does not persuade me that economics rises to the level of a science.
this piece is so important it makes me want to apply to Columbia after 45 years of being a very active participant in global markets.Tooze again gives great support to the work of Benjamin Cohen and his 2008 book on International Political Economy--thank you Adam for bringing Kindleberger to the fore yet again.The strong dollar is putting a great deal of pressure on the global financial system and the US modelers will again find out they are not an Island.The FED used its exorbitant privilege to inflate the global system and now wants to negate its exorbitant burden of preventing a massive global deflation---Minsky indeed
Thank you for this column. I first heard of Minsky in early 2009 just when the Great Recession was spiraling. I did read his book and it made good sense to this non-economist. There are lots of weak spots in the US financial system and just like houses of cards, some come tumbling down every ten years or so.
Nice analysis. Perhaps the problem was that the other nominees were more dismal? Or perhaps the committee simply wanted a reason to celebrate Bernanke for his applied economics efforts keeping the financial system running back in 2007-2009.
This article is great as per, and it made me realise that the whole debate around 'endogenous versus exogenous money' has been too narrow, focused on the issue of whether banks create deposits in the process of lending. The BIS section in particular shows that understanding endogenous money entails understanding how the financial system endogenously evolves over time to create new lending facilities, financial instruments, and even institutions. It seems to me that a half-decent Nobel prize would have been to whichever work was at the forefront of discovering these evolutions and that those who subscribed to endogenous money (even if not by name, Gilian Tett springs to mind) were more likely to be studying such evolutions.
The dump on Bernanke is justified. I'm not sure about the dump on Diamond-Dybvig. Nobody really cares about their toy model--but they emphasized precisely the right issue, at almost precisely the right time. Maturity mismatch+leverage=scary.
Thank you for this wonderful post. I am a (US) pediatrician, but/and my undergraduate degree is Economics (early 1990s Princeton), and I am the daughter of an economist. There are so many things I love about the discipline, so many ways I find even its basic principles applicable in the real world. And. As much as I appreciate Bernanke’s stewardship of US monetary policy, when I heard that received a Nobel for (after my mother sent me the headline in happy excitement), my immediate thought was, “Someone got a Nobel for proving that Bank runs are a thing? In the 1980s? Wasn’t “Its a Wonderful Life” in black and white?” I then immediately felt guilty for being churlish and snarky, and generally not my best self. I am so pleased to have someone so brilliant and articulate and gracious explain why I might not be totally off base. Thanks for all you do and share.
I wait with bated breath for economists to discover the wheel and fire. They might even one day even advance so far as to discover time and distance but for that I will not be holding my breath.
Economists have this strange idea that mathematical rigor is the signature of science but I have some bad news for them: It ain't. Economics suffers from a bad case of physics envy.
A couple of key elements driving the borrowers’ move to marketable securities from bank loans are not mentioned: loan covenants and bank regulation. Bank loans have traditionally had more covenants and a loan officer butting in on the borrower’s business. Borrowers hate that. And bank regulation almost by definition means that in many cases the borrower can’t use a bank.
Finally, without wanting to be nasty, marketable securities brought investment banks onto the playing field and their almost risk free ability to profit from placing securities left commercial banks, literally, holding the bag…empty.
Thank you for this wonderfully clarifying piece. I’m a lawyer, not an economist, but have tried to stay relatively informed on these issues, perhaps because my early career in the Midwest coincided with the Volcker shocks, and I was deeply impressed--or depressed--by the industrial wreckage that surrounded me in the aftermath.
Upon reading the Nobel citation the other day, I asked myself, “Why did anybody need to demonstrate in the ‘80s that bank runs could happen, when they’ve been happening in broad daylight for centuries?”
Now, I get it.
Thank you for the link. I am familiar with the counter-arguments of the economists but it still does not persuade me that economics rises to the level of a science.
this piece is so important it makes me want to apply to Columbia after 45 years of being a very active participant in global markets.Tooze again gives great support to the work of Benjamin Cohen and his 2008 book on International Political Economy--thank you Adam for bringing Kindleberger to the fore yet again.The strong dollar is putting a great deal of pressure on the global financial system and the US modelers will again find out they are not an Island.The FED used its exorbitant privilege to inflate the global system and now wants to negate its exorbitant burden of preventing a massive global deflation---Minsky indeed
Thank you for this column. I first heard of Minsky in early 2009 just when the Great Recession was spiraling. I did read his book and it made good sense to this non-economist. There are lots of weak spots in the US financial system and just like houses of cards, some come tumbling down every ten years or so.
Nice analysis. Perhaps the problem was that the other nominees were more dismal? Or perhaps the committee simply wanted a reason to celebrate Bernanke for his applied economics efforts keeping the financial system running back in 2007-2009.
This article is great as per, and it made me realise that the whole debate around 'endogenous versus exogenous money' has been too narrow, focused on the issue of whether banks create deposits in the process of lending. The BIS section in particular shows that understanding endogenous money entails understanding how the financial system endogenously evolves over time to create new lending facilities, financial instruments, and even institutions. It seems to me that a half-decent Nobel prize would have been to whichever work was at the forefront of discovering these evolutions and that those who subscribed to endogenous money (even if not by name, Gilian Tett springs to mind) were more likely to be studying such evolutions.
The dump on Bernanke is justified. I'm not sure about the dump on Diamond-Dybvig. Nobody really cares about their toy model--but they emphasized precisely the right issue, at almost precisely the right time. Maturity mismatch+leverage=scary.
Thank you for this wonderful post. I am a (US) pediatrician, but/and my undergraduate degree is Economics (early 1990s Princeton), and I am the daughter of an economist. There are so many things I love about the discipline, so many ways I find even its basic principles applicable in the real world. And. As much as I appreciate Bernanke’s stewardship of US monetary policy, when I heard that received a Nobel for (after my mother sent me the headline in happy excitement), my immediate thought was, “Someone got a Nobel for proving that Bank runs are a thing? In the 1980s? Wasn’t “Its a Wonderful Life” in black and white?” I then immediately felt guilty for being churlish and snarky, and generally not my best self. I am so pleased to have someone so brilliant and articulate and gracious explain why I might not be totally off base. Thanks for all you do and share.
Vastly informative. So much so my brain hurts.