Financial Crisis

Financial Crisis

Research

Vern McKinley | Jun 18, 2015
The idea that banks are special was most succinctly summarized by Gerald Corrigan more than 30 years ago in an analysis prepared for the Federal Reserve Bank of Minneapolis, where Corrigan was president at the time. With the help of his mentor, then Federal Reserve Chairman Paul Volcker, his analysis pondered the characteristics of banks that make them special; justified the provision of a supporting safety net for banks based on financial stability concerns; and detailed the costs and restrictions that banks must subject themselves to. But the years since Corrigan’s analysis have seen two severe financial crises,and as the crisis of 2007–2009 clearly revealed, banks are not special, as the safety net was applied to a wide range of nonbank institutions. The Dodd-Frank Act was intended to cut back on the safety net by giving financial authorities wide discretion, but the right approach to rein in the safety net would be to cut back its beneficiaries…
Jason E. Taylor, Andrea Castillo | Jan 13, 2015
A new study published by the Mercatus Center at George Mason University examines the use of expansionary fiscal policy to stimulate a contracting economy. The study concludes that attempts to use fiscal policy to solve broader economic troubles have failed even by the theory proponents’ own standards. In addition to being poorly timed and targeted, stimulus spending has led to permanent increases in the size and scope of government.
Hester Peirce | Jan 06, 2015
In a new paper for the Mercatus Center at George Mason University, senior research fellow Hester Peirce demonstrates that FINRA is not structured in a way to produce high-quality regulation and is not accountable to the government, the industry, or the public.
David Beckworth | Jul 10, 2014
Inflation targeting emerged in the early 1990s and soon became the dominant monetary-policy regime. It provided a much-needed nominal anchor that had been missing since the collapse of the Bretton Woods system.
Hester Peirce | May 01, 2014
American International Group, Inc. (AIG), a large insurance company, received a massive bailout during the financial crisis in response to difficulties centered on the company’s multifaceted exposure to residential mortgage-backed securities. The company is back on its feet, albeit in more streamlined form and with a new overseer—the Federal Reserve. This paper focuses on a piece of the AIG story that is rarely told—the role of the company’s securities-lending program in imperiling the company and some of its insurance subsidiaries. The paper argues that regulatory responses to AIG have been inapt. AIG did not need another regulator, but better risk management. The markets would have conveyed that message clearly had regulators not intervened to ensure AIG’s survival. This paper adds the missing piece to the AIG story in an effort to challenge the notion that more regulatory oversight for companies like AIG will prevent future crises.
Hester Peirce, Ian Robinson, Thomas Stratmann | Feb 27, 2014
This paper presents the results of the Mercatus Center’s Small Bank Survey, which include responses from approximately 200 banks across 41 states with less than $10 billion in assets each, serving mostly rural and small metropolitan markets.

Testimony & Comments

Hester Peirce | May 13, 2015
The Dodd-Frank Wall Street Reform and Consumer Protection Act—does not make another crisis less likely. To the contrary, it sets the stage for another, worse crisis in the future. Government regulation—from bank regulation to housing policy to credit rating agency regulation—played a key role in the crisis. These policies shaped market participants’ behavior in destructive ways. Dodd-Frank continues that pattern.
Hester Peirce | Jul 10, 2014
As the Federal Reserve celebrates one hundred years, reform efforts are timely. Consideration of fundamental questions about the Federal Reserve’s role in the regulatory landscape and in the markets should accompany those efforts.
Hester Peirce | Jul 18, 2013
Chairman Jordan, Ranking Member Cartwright, and members of the Subcommittee, thank you for the opportunity to be part of today’s hearing on the effect of Dodd-Frank on community banks. Dodd-Frank was the product of desperation in the face of a deeply painful financial crisis and outrage at the big financial institutions that were at the center of the trouble. Not only does Dodd-Frank fail to effectively address the problems that precipitated the crisis, but it also imposes costly burdens on many businesses that were not central causes of the crisis. Among these are community banks.
Hester Peirce | May 06, 2013
The proposed rules would implement sections 806(a) and (c) of Dodd-Frank, which allow the Board to authorize Reserve Banks to establish and maintain accounts for, provide certain services to,[1] and pay interest on balances maintained by or on behalf of financial market utilities (FMUs) that are designated by the Financial Stability Oversight Council (FSOC) as systemically important or likely to become systemically important.
Arnold Kling | Apr 24, 2013
I do not believe that the 30-year fixed-rate mortgage can be issued in large volume without taxpay- ers becoming liable for interest-rate risk. Conversely, if we reform the housing system so that the private sector truly bears the risk, then borrowers would encounter a large differential between the cost of a 30-year fixed-rate mortgage and the cost of a loan with an interest rate that is fixed for only 5 years. Borrowers should be making their choices based on this true cost differential.
| Dec 15, 2011
Anthony Sanders testified before the U.S. House Committee on Oversight and Government Reform Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs on the role of the U.S. in addressing the European debt crisis.

Expert Commentary

Jul 23, 2015

All told, our current legal and regulatory framework invites bank failure even five years after the passage of Dodd-Frank. Legislation focused on size does not address the problem, since it does nothing to reestablish the market discipline missing in the United States since before the Great Depression. Measuring equity at market value would restore that much-needed discipline.
Apr 20, 2015

Instead of cracking down on risky lending through measures like qualified mortgage rules, maybe cracking down on the Basel-type capital requirements – whose risk buckets favored holding many of the securitized products that have gone bust – is the way to end the type of structured product crashes and financial crises we have observed over the last 20 years. Simpler, higher capital requirements can do that.
Jan 16, 2015

The following scene (colored by some creative license) took place at MetLife headquarters last month, when the Financial Stability Oversight Council (FSOC) declared MetLife to be a systemically important non-bank financial company. As a consequence, MetLife will be regulated by the Federal Reserve using Dodd-Frank's prescriptive, bank-like regulatory framework.
Jan 14, 2015

In an op-ed last week, Treasury Secretary Lew defended Dodd-Frank against efforts by the new Congress to reform the financial law. In his view, changing-or even suggesting changes to-Dodd-Frank seems to be tantamount to inviting another financial crisis. Far from being the cornerstone of a new era of financial stability, however, Dodd-Frank is more likely to be at the root of a future crisis.
Jan 08, 2015

Few Americans have even heard of the Financial Industry Regulatory Authority (FINRA), but the securities regulator is about to become intimately familiar with all Americans' investment portfolios. FINRA recently proposed the Comprehensive Automated Risk Data System, known by the less scary-sounding shorthand "CARDS." In the name of investor protection and investor confidence, FINRA plans to monitor all securities accounts and transactions. Investors should run from this kind of protection.
Jan 05, 2015

Many people blame the recent financial crisis on a lack of regulation and fraud in the financial system. However, the Federal Reserve appears to have been a significant contributor to the crisis in terms of both its poor monetary policy and faulty regulation of the financial system.

Charts

This week’s chart series shows that the five largest banks (by assets) in Q4 2014 held 46 percent of US banking assets and 40 percent of domestic deposits. That’s up from 28 percent and 20 percent, respectively, in early Q1 2000.

Experts

Podcasts

Hester Peirce | August 22, 2013
Hester Peirce discusses the Push to Implement Dodd-Frank on Eye on Your Money

Recent Events

Books

Media Clippings

Benjamin M. Blau | Oct 27, 2013
Benjamin Blau cited at The Washington Examiner.
Hester Peirce | Jul 31, 2013
The Fed was probably the most effective lobbyist during Dodd-Frank and they managed to expand their jurisdiction quite a lot.
Patrick McLaughlin | Jul 22, 2013
The researchers examined data from the Code of Federal Regulations and determined that over 7,000 new financial rules were implemented between 1999 and 2008, bringing the total number of regulations to 47,494 just before the crash.
| Jul 12, 2013
"It appears that the big banks are growing in volume while mid – and small banks are… not," Sanders concluded.
Todd Zywicki | Jan 24, 2013
Todd Zywicki cited at the National Review Online.
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