Get Your Banking Crises Straight

I've been saying this privately for some time, but only now finally getting around to saying it here: In many ways, the banking crisis of 1872-73, less so the bank failures around the Great Depression, is the right mental model in which to think about the current crisis.

The context: A banking crisis in Europe took hold in 1872 after a mortgage lending boom, one in which house prices climbed endlessly, houses became loan collateral, and all sorts of dubious banking and lending behavior went on, much of it pushed by return-seeking banks. Everything came unglued in late 1873 as the European economy unwound and housing prices began falling, thus causing European banks to fail in a cascade, and interbank lending rates to soar as no bank knew which other bank would fail next. The problems spread to the U.S. in 1873, where debt-needy railroads began failing as European banks withdrew funding, this after a long boom had produced an over-levered mess, and then large numbers of U.S. banks followed afterward.

The whole thing took around four years to unwind in the U.S., and slightly longer in Europe. Admittedly, there was little done at the federal level to ameliorate things in any meaningful way, and there were widespread labor troubles at the same time, both of which helped cause the economy to stay down for the count, adding to the woes.

Nevertheless, people need to focus on the right things. And to my mind that is the banking crisis of 1873, and less so the causes and fixes of 1929.

More reading:

• The crisis of 1873: Perspectives from multiple asset classes (SSRN)
• The real Great Depression (Chronicle of Higher Education)

Comments

[helplessobs...:]

In time it will become evident who will absorb the lending losses. For our part, we have already made our contribution. My wife's IRA $15k of WB stock traded last week at $0.91 for a loss of $14.7k. We've done our part to make good on the fraud committed by Golden West management and employees.

2008 Oct 03 04:25 PM

[Steven Hansen:]

this crisis is different than either 1872 or 1929. the crisis of 1872 does not have an abundance of data to extract conclusions, and we only have the biased news media of that time (things have changed?) to draw conclusions.

never-the-less, we are creating another episode in economic history which will be debated years from now concerning the causes and the steps we should have taken to prevent or mitigate this crisis.

2008 Oct 03 11:17 PM

[Dan Walker:]

Paul, you may be pretty good when you get about 20 years under your belt. The difference between now and then is in 1872, there was no central bank to throw more credit at the problem. In the bad 'ol hard currency days, the panics were short, the assets went splat, and the idiots went broke. That difference is why we are going down now, and that is why you are comparing apples to Hondas. If you are jockeying for a job with the Fed, you sound like a shoe-in.

2008 Oct 04 06:01 AM