Summary:
Comparison between current financial crisis and Nordic crisis; similar in terms of boom and bust; different in terms of complexity of financial system then and now; Bear Stearns; blurring boundary between insolvency and illiquidity (19/03/2008)
Notes:
- Fed's $30b temporary shows role central bank now much wider than used to be
- Bearn Stearns was deemed to central to complex web of America's financial system to be allowed to fail
- financial crises in poorer countries tend to be deeper and more costly
- Argentina (1980s): 55% of GDP to fix
- Finland (1990s): 8%
- banking crisis Norway: similarity with current crisis;
- bust followed economic and asset-price booms fired by deregulation of credit, low interest rates and lax supervision
- when it became apparent three biggest banks were insolvent, they were privatised
- state actually made profit
- Denmark avoided storm by applying stricter capital rules
- these days much harder for regulators to which banks are insolvent
- bad debt hidden within complex securities, value of which is almost impossible to measure when markets dried up
- trouble lies as much with financial markets as with banks that trade in them
- growing complexity of links between banks is reason why BS could not be left to collapse, though 15 years ago would not have worried regulators
- BS demise also shows boundary between illiquidity and insolvency fast dissolving
- sold for a fraction of book value after being shut out of lending markets; yet not clear whether it was insolvent (ie assets worth less than it owned)
- more banks may fall into liquidity traps that snared BS and Northern Rock
- due to entanglement of short-term funding and long-term derivatives
- opportunity for government to buy assets at huge discount
