FTE/PTA Conference
Perspectives From and On the Federal Reserve System
Bank Runs and Private Remedies
1. In light of the recent experience with “The Great Recession” and considering the history of bank panics/runs described in Lombard Street, evaluate Dwyer/Gilbert’s view of the probability of bank runs and their view of private reactions to bank panics.
2. Dwyer/Gilbert acknowledge that “A low probability is not the same as zero probability”(44). If bank runs are indeed a Black Swan occurrence how do you evaluate the author’s analysis of the efficacy of private rather than state responses? In a broader sense, how does this article help focus attention on the relative costs and benefits of private v public action in response to a Black Swan event?
3. Describe the support the author’s provide for their assertions: “The view that the banking system is vulnerable to runs may be based primarily on the experience of the early 1930s, but the most relevant period to examine for evidence of runs is before the operation of the Federal Reserve System.”(47). Why do they make this assertion, does it strengthen or weaken their argument and how might Bagehot comment on this argument.
4.Dwyer/Gilbert indicate that, during runs in their period of analysis “banks rationed currency”(51). How did banks ration currency? How does this rationing compare to Bagehot’s maxim to lend freely . . . How does this rationing compare the actions taken by the Federal Reserve since inception of the central bank?
5. Losses from bank runs can accrue to depositors, bank stockholders and the general public. The justification for government action seems to be losses to the general public (external to the direct market interaction). How do the authors compare the losses in each group during the “free banking period” and FRS period and what conclusions are the author’s inviting the reader to make.
Lessons Learned?
1. After reading Wheelock’s article, how would you guess he would evaluate the performance of the Fed in terms of supervision/regulation?
2. Wheelock indicated that the Fed acted to “promote recovery of housing markets”. Does this type of action rise to the level of the government picking winners (and penalizing losers) and if so, what does this imply about the evolution of monetary policy?
3. How does Wheelock support the conclusion that “The Fed clearly did not repeat many mistakes of the Great Depression during the crisis of 2007-9?” What actions of the Fed during this period might be considered as mistakes – either by Bagehot or Bernanke?
What Powers the Fed?
1. Feldstein seems to disagree with Wheelock (question 3 above) when he says: “The financial crisis was due not to a lack of regulation but to a failure of supervision of policy actions more generally”(2). What policy actions does Feldstein indict and how does he press his argument of policy failure?
2. Robert Higgs writes of the ratchet effect of government action. His analysis suggests that during a crisis, the government increases action and activity to address the crisis. Post crisis, government action recedes, but not to the level of previous government action – thus over time as crisis are addressed there is a tendency for government action to ratchet to higher levels. How might Feldstein respond to a suggestion that recent FED action exemplifies Higg’s ratchet effect. What are costs and benefits might Feldstein see in recent FED actions?
3. Bagehot’s maxim that the central bank should lend freely on good security at high rates was described in Lombard Street. What is Feldstein’s assessment of FED action from the perspective of Bagehot?
Too Big Not to Fail and letters to the editor
1. John Macey (Yale Law) writes of this legislation: “Laws classically provide people with rules. Dodd-Frank is not directed at people. It is an outline directed at bureaucrats . . .” Walter Bagehot in his plan to manage the Bank of England seems to advocate a bureaucracy with a permanent “dignified subordinate” (VIII.26) whose appointment as the “new and skilled authority of the Bank is the greatest reform which can be made there”(VIII.32). What can you find in the Economist article that would support the contention that Bagehot would support Dodd Frank?
2. Bagehot writes: “New wants are mostly supplied by adaption, not by creation or foundation”(III.2). How would this assertion shape Bagehot’s analysis of Dodd Frank and the debate currently under discussion regarding Dodd Frank?
3. FA Hayek made a distinction between law and legislation. The former were the result of an emergent process that, over time, generated general rules. He considered law an important institution to support society. Legislation, in contrast, was specific, detailed regulation, often generated in a very short time by legislative bodies. Sheila Blair commented on DFA: “regulators should think hard about starting over with a simple rule” (5). In an era where the legislative process is scrutinized for rent seeking in the form of earmarks, revolving door employment and intense lobbying what are potential consequences to use of legislation rather than law formation (to use Hayek’s paradigm) to address the 2007-9 financial crisis.
4. Bagehot analyzed the impact of leverage in his discussion of reserves and bank regulation. In letter responding to the Economist article “Too big to fail”, Neal Wolin, Dept. Sec. of Treasury writes that the original article, “argued that the reforms (in Dodd Frank) do nothing to address the most important problems in our financial system. And yet they have already brought about a fundamental change in capital requirements, the most important source of vulnerability in any financial system.”(4). How might Bagehot respond to Wolin’s assertion and how might the assertion that capital requirements are the most important element of the banking sector be supported.
5. Dr. Jan Eberly asserts that the Economist article “Too big to fail” presents “blithe conclusions about the cost of regulations (that) are below the standard of evidentiary rigor”. Thank back to your reading of both the article and Lombard Street – does Dr. Eberly have a point and if so, what criteria of rigor might she find satisfying and what type of evidence did the original article lack?
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