Financial Crisis

Financial Crisis

Research

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.
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.

Testimony & Comments

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.
| May 25, 2011
Anthony Sanders testified before the House Committee on Financial Services about steps to end the GSE bailout.

Expert Commentary

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.
Dec 17, 2014

When Dodd-Frank became law more than four years ago, even its proponents acknowledged that the law needed some tweaks. After all, remaking the financial markets in the wee hours of the night fueled by cold pizza and too much caffeine is a risky undertaking. Despite acknowledged problems, the law has remained largely untouched until this month. Fixes look like capitulation to Wall Street.
Dec 09, 2014

Were we to let the financial industry make its own way during ordinary times — a way that certainly would not be without shareholder and creditor losses and firm failures — the industry would be much better equipped to handle crises on its own.

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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