Financial Crisis

Research

Resolving Too-Big-To-Fail Banks in the United States James R. Barth, Apanard Prabha \| Mar 07, 2013 Banks have failed throughout US history. The worst years for such failures were during the Great Depression: roughly 9,000 of about 25,000 banks failed, with nearly half of the failures occurring in 1933 alone. Depositors everywhere became concerned that their banks were on the verge of insolvency, and they rushed to withdraw their funds. This forced banks to sell off their assets at fire sale prices, thereby turning illiquidity problems into insolvency problems throughout the banking industry. The result was a major disruption in the payments system and a severe tightening of available credit, with a devastating impact on economic activity.	The Economic Situation, March 2013 Bruce Yandle \| Mar 01, 2013 There was only one lane open as I made my trip to Atlanta; the other three were blocked with those unhappy yellow and black make-believe barrels used by the highway folks. Traffic flow was constrained by efforts to repair potholes and broken pavement. We in the slow lane had little choice in the matter. Instead of 70, we were slowed to 20 miles per hour. We had to accept our fate, or find another route at the next exit.
The Economics and Regulation of Network Branded Prepaid Cards Todd Zywicki \| Jan 15, 2013 This paper describes the current economic and regulatory landscape for prepaid cards. The market appears to be robustly competitive, as recent years have seen declining costs and increasing functionality as well as entry of major players such as American Express and several large banks. Nor is there any evidence that consumers systematically err in the cards that they choose. Absent a demonstrable competitive market failure or systematic consumer abuse, prescriptive regulation of the terms and substance of prepaid cards would likely have unintended consequences that would exceed the benefits to consumers. On the other hand, there are some regulations that might be enacted that could promote competition and consumer welfare in this rapidly evolving market.	Rethinking the Volcker Rule Hester Peirce, Robert Greene \| Jan 15, 2013 The Volcker Rule prohibits financial institutions reliant on deposit insurance from engaging in proprietary trading and limits their relationships with hedge funds and other private funds. These activities were not central to the most recent financial crisis,[1] but former Federal Reserve chairman Paul Volcker championed the rule’s inclusion in the Dodd- Frank Act in response to legitimate concerns that the federal deposit insurance umbrella was being stretched beyond its intended purpose. Bad trading bets by these financial institutions could cause losses for which the deposit insurance fund (and ultimately taxpayers) would be on the hook.
Has the Fed Been a Failure? Lawrence H. White, George Selgin, William D. Lastrapes \| Sep 24, 2012 As the 100th anniversary of the 1913 Federal Reserve Act approaches, we assess whether the nation’s experiment with the Federal Reserve has been a success or a failure. Drawing on a wide range of recent empirical research, we ﬁnd the following: (1) The Fed’s full history (1914 to present) has been characterized by more rather than fewer symptoms of monetary and macroeconomic instability than the decades leading to the Fed’s establishment. (2) While the Fed’s performance has undoubtedly improved since World War II, even its postwar performance has not clearly surpassed that of its undoubtedly ﬂawed predecessor, the National Banking system, before World War I. (3) Some proposed alternative arrangements might plausibly do better than the Fed as presently constituted. We conclude that the need for a systematic exploration of alternatives to the established monetary system is as pressing today as it was a century ago.	The Economics and History of Cronyism David R. Henderson \| Jul 26, 2012 The more power the government has over the economy, the more allocation of resources will depend on political connections. The way to eliminate cronyism is to have free markets and little government control. As we shall see, cronyism has been around for a long time and is a bipartisan problem that has thrived under Democratic and Republican presidents and congresses. Cronyism not only picks winners based on political connections rather than on the extent to which they serve consumers, but also is destructive of wealth, sometimes highly so.

More Research

Testimony & Comments

Financial Market Utilities 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.	Building a Sustainable Housing Finance System: Examining Regulatory Impediments to Private Investment Capital 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.
What the Euro Crisis Means for Taxpayers and the U.S. Economy Anthony B. Sanders \| 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.	Transparency, Transition, and Taxpayer Protection: More Steps to End the GSE Bailout Anthony B. Sanders \| May 25, 2011 Anthony Sanders testified before the House Committee on Financial Services about steps to end the GSE bailout.
The Need for National Mortgage Servicing Standards Anthony B. Sanders \| May 12, 2011 Anthony Sanders testified before the Senate Subcommittee on Housing, Transportation and Community Development…	Can Bankruptcy Courts Limit Homeowner and Investor Losses? Anthony B. Sanders \| Feb 01, 2011 The housing market needs to recover and persistent attempts at delaying foreclosure (whether through mediation or moratorium) only adds additional uncertainty to the housing market and slows any recovery.

More Testimony & Comments

Expert Commentary

If The IRS Bothers You, So Should The FSOC and CFPB Real Clear Markets By Hester Peirce \| May 22, 2013 The recent revelations about the goings-on at the Internal Revenue Service have gotten a lot of attention. When the patina of government impartiality shows itself so disturbingly thin, people of all political stripes sit up and take notice. The hard lessons drawn from the IRS experience should inform the broader policy debates about regulatory structure and oversight.	The Federal Reserve Ignores Its Own Role in the Financial Crisis U.S. News and World Report By Steven Horwitz \| May 20, 2013 Since the financial meltdown in 2008, the Federal Reserve's range of powers have expanded, as have the kinds of financial institutions it monitors and regulates. Fed Chairman Ben Bernanke is now saying that the Fed's oversight has expanded beyond strictly financial institutions to wide swaths of the economy that might, in his words, provide evidence of "emerging vulnerabilities."
Bank Regulators Never 'Encourage,' They Require Real Clear Markets By Hester Peirce \| Apr 24, 2013 The National Credit Union Administration marked Earth Day on Monday by issuing a press release celebrating the agency's various green initiatives. Along with conserving energy and urging employees to bicycle to work and grow plants in their offices, the NCUA "encourage[s] credit unions to make the same commitment to incorporating greater environmental awareness into their daily operations." This statement sounds harmless enough, but-given the complexity of the relationship between regulators and the entities they regulate-even statements urging "credit unions to lead in environmental stewardship" must be made with care.	President Trumpets 'Financial Capability' While Undermining It Real Clear Markets By Hester Peirce \| Apr 10, 2013 The President proclaimed April to be National Financial Capability Month, a new twist on what used to be called financial literacy month. Who can argue with wanting to make sure that people have "access to the information and tools that empower them to operate safely and smartly in the marketplace"? The strategy being employed to achieve this objective is the problem. At the same time the government is talking about financial capability, its regulatory policy is undermining-not building up-financial capability.
Dodd-Frank: 'Financial Stability' On the Backs of Taxpayers Real Clear Markets By Hester Peirce \| Mar 13, 2013 March 11 marked the start of mandatory central clearing for certain kinds of over-the-counter derivatives called swaps. The central clearing requirement, a major component of Dodd-Frank, is purportedly one of the pillars upon which the future stability of our financial system rests. That pillar, however, is not as sturdy as it looks, particularly because regulators-blinded by central-clearing-love-are leaning on it. This pillar could come crashing down with destructive force. Thanks to Dodd-Frank, taxpayers will be there to pick up the pieces.	For Real Reform We Must Move Past 'Too Big to Jail' Hype US News and World Report Debate Club By Hester Peirce \| Mar 08, 2013 Moving past the "too big to jail" hype will enable us to productively focus on solving the "too big to fail" problem through clear, strong, procompetitive, market-discipline-focused rules.

More Expert Commentary

Experts

Videos

Keith Hall Discusses the Latest Unemployment Rate on Fox Business News

Keith Hall | November 02, 2012

Keith Hall Discusses the Latest Unemployment Rate on Fox Business News

Keith Hall | November 02, 2012

Podcasts

Regulation University: Dodd-Frank: What It Does and Why It's Flawed

Hester Peirce | April 09, 2013

Hester Peirce Discusses Dodd Frank at this Regulation University event.

Download the MP3

More Podcasts

Recent Events

Breaking the Bank: Understanding the Current Banking Crises

The financial services industry is going through its toughest period since the Savings and Loan crises of the 1990’s. As Congress begins to ask questions and propose solutions, the Mercatus Center would like to help policy makers better understand the current situation with a two-day course designed to explore some of the underlying issues.

Books

Dodd-Frank: What It Does and Why It's Flawed

| Jan 08, 2013

More than 360,000 words in length, the Dodd-Frank Wall Street Reform and Consumer Protection Act is the longest and most complex piece of financial legislation in American history. The nature and magnitude of its effects, both intended and unintended, will become clearer as regulators exercise the broad discretion given to them under the law.

Media Clippings

Todd Zywicki on the CFPB’s ‘Policy-Based Evidence-Making’

Todd Zywicki | Jan 24, 2013

Resolving Too-Big-To-Fail Banks in the United States James R. Barth, Apanard Prabha \| Mar 07, 2013 Banks have failed throughout US history. The worst years for such failures were during the Great Depression: roughly 9,000 of about 25,000 banks failed, with nearly half of the failures occurring in 1933 alone. Depositors everywhere became concerned that their banks were on the verge of insolvency, and they rushed to withdraw their funds. This forced banks to sell off their assets at fire sale prices, thereby turning illiquidity problems into insolvency problems throughout the banking industry. The result was a major disruption in the payments system and a severe tightening of available credit, with a devastating impact on economic activity.	The Economic Situation, March 2013 Bruce Yandle \| Mar 01, 2013 There was only one lane open as I made my trip to Atlanta; the other three were blocked with those unhappy yellow and black make-believe barrels used by the highway folks. Traffic flow was constrained by efforts to repair potholes and broken pavement. We in the slow lane had little choice in the matter. Instead of 70, we were slowed to 20 miles per hour. We had to accept our fate, or find another route at the next exit.
The Economics and Regulation of Network Branded Prepaid Cards Todd Zywicki \| Jan 15, 2013 This paper describes the current economic and regulatory landscape for prepaid cards. The market appears to be robustly competitive, as recent years have seen declining costs and increasing functionality as well as entry of major players such as American Express and several large banks. Nor is there any evidence that consumers systematically err in the cards that they choose. Absent a demonstrable competitive market failure or systematic consumer abuse, prescriptive regulation of the terms and substance of prepaid cards would likely have unintended consequences that would exceed the benefits to consumers. On the other hand, there are some regulations that might be enacted that could promote competition and consumer welfare in this rapidly evolving market.	Rethinking the Volcker Rule Hester Peirce, Robert Greene \| Jan 15, 2013 The Volcker Rule prohibits financial institutions reliant on deposit insurance from engaging in proprietary trading and limits their relationships with hedge funds and other private funds. These activities were not central to the most recent financial crisis,[1] but former Federal Reserve chairman Paul Volcker championed the rule’s inclusion in the Dodd- Frank Act in response to legitimate concerns that the federal deposit insurance umbrella was being stretched beyond its intended purpose. Bad trading bets by these financial institutions could cause losses for which the deposit insurance fund (and ultimately taxpayers) would be on the hook.
Has the Fed Been a Failure? Lawrence H. White, George Selgin, William D. Lastrapes \| Sep 24, 2012 As the 100th anniversary of the 1913 Federal Reserve Act approaches, we assess whether the nation’s experiment with the Federal Reserve has been a success or a failure. Drawing on a wide range of recent empirical research, we ﬁnd the following: (1) The Fed’s full history (1914 to present) has been characterized by more rather than fewer symptoms of monetary and macroeconomic instability than the decades leading to the Fed’s establishment. (2) While the Fed’s performance has undoubtedly improved since World War II, even its postwar performance has not clearly surpassed that of its undoubtedly ﬂawed predecessor, the National Banking system, before World War I. (3) Some proposed alternative arrangements might plausibly do better than the Fed as presently constituted. We conclude that the need for a systematic exploration of alternatives to the established monetary system is as pressing today as it was a century ago.	The Economics and History of Cronyism David R. Henderson \| Jul 26, 2012 The more power the government has over the economy, the more allocation of resources will depend on political connections. The way to eliminate cronyism is to have free markets and little government control. As we shall see, cronyism has been around for a long time and is a bipartisan problem that has thrived under Democratic and Republican presidents and congresses. Cronyism not only picks winners based on political connections rather than on the extent to which they serve consumers, but also is destructive of wealth, sometimes highly so.

Financial Market Utilities 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.	Building a Sustainable Housing Finance System: Examining Regulatory Impediments to Private Investment Capital 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.
What the Euro Crisis Means for Taxpayers and the U.S. Economy Anthony B. Sanders \| 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.	Transparency, Transition, and Taxpayer Protection: More Steps to End the GSE Bailout Anthony B. Sanders \| May 25, 2011 Anthony Sanders testified before the House Committee on Financial Services about steps to end the GSE bailout.
The Need for National Mortgage Servicing Standards Anthony B. Sanders \| May 12, 2011 Anthony Sanders testified before the Senate Subcommittee on Housing, Transportation and Community Development…	Can Bankruptcy Courts Limit Homeowner and Investor Losses? Anthony B. Sanders \| Feb 01, 2011 The housing market needs to recover and persistent attempts at delaying foreclosure (whether through mediation or moratorium) only adds additional uncertainty to the housing market and slows any recovery.

If The IRS Bothers You, So Should The FSOC and CFPB Real Clear Markets By Hester Peirce \| May 22, 2013 The recent revelations about the goings-on at the Internal Revenue Service have gotten a lot of attention. When the patina of government impartiality shows itself so disturbingly thin, people of all political stripes sit up and take notice. The hard lessons drawn from the IRS experience should inform the broader policy debates about regulatory structure and oversight.	The Federal Reserve Ignores Its Own Role in the Financial Crisis U.S. News and World Report By Steven Horwitz \| May 20, 2013 Since the financial meltdown in 2008, the Federal Reserve's range of powers have expanded, as have the kinds of financial institutions it monitors and regulates. Fed Chairman Ben Bernanke is now saying that the Fed's oversight has expanded beyond strictly financial institutions to wide swaths of the economy that might, in his words, provide evidence of "emerging vulnerabilities."
Bank Regulators Never 'Encourage,' They Require Real Clear Markets By Hester Peirce \| Apr 24, 2013 The National Credit Union Administration marked Earth Day on Monday by issuing a press release celebrating the agency's various green initiatives. Along with conserving energy and urging employees to bicycle to work and grow plants in their offices, the NCUA "encourage[s] credit unions to make the same commitment to incorporating greater environmental awareness into their daily operations." This statement sounds harmless enough, but-given the complexity of the relationship between regulators and the entities they regulate-even statements urging "credit unions to lead in environmental stewardship" must be made with care.	President Trumpets 'Financial Capability' While Undermining It Real Clear Markets By Hester Peirce \| Apr 10, 2013 The President proclaimed April to be National Financial Capability Month, a new twist on what used to be called financial literacy month. Who can argue with wanting to make sure that people have "access to the information and tools that empower them to operate safely and smartly in the marketplace"? The strategy being employed to achieve this objective is the problem. At the same time the government is talking about financial capability, its regulatory policy is undermining-not building up-financial capability.
Dodd-Frank: 'Financial Stability' On the Backs of Taxpayers Real Clear Markets By Hester Peirce \| Mar 13, 2013 March 11 marked the start of mandatory central clearing for certain kinds of over-the-counter derivatives called swaps. The central clearing requirement, a major component of Dodd-Frank, is purportedly one of the pillars upon which the future stability of our financial system rests. That pillar, however, is not as sturdy as it looks, particularly because regulators-blinded by central-clearing-love-are leaning on it. This pillar could come crashing down with destructive force. Thanks to Dodd-Frank, taxpayers will be there to pick up the pieces.	For Real Reform We Must Move Past 'Too Big to Jail' Hype US News and World Report Debate Club By Hester Peirce \| Mar 08, 2013 Moving past the "too big to jail" hype will enable us to productively focus on solving the "too big to fail" problem through clear, strong, procompetitive, market-discipline-focused rules.