Smith Faculty Opinion Article
The 30 Seconds Outlook
April 15, 2011
“The financial crisis of 2008-09---the most severe
since the 1930s---had its origins in the housing market.”
- James Bullard, Christopher J. Neely, and David C. Wheelock,
Federal Reserve Bank of St. Louis, Review, September/October 2009
In reviewing the causes of the banking crisis in 2007, Perry and Dell (The
American, 12/26/10) examined historical data and found that from 1875-1913 there
were only four banking crises worldwide. But, from 1978-2009, a period of much
more extensive regulation, central bank intervention, deposit protection and
government control of the mortgage market, there were about 140 banking crises.
Of these 140 crises, 20 were more severe than any in the earlier period.
This historical finding gives pause to claims of the Obama Administration and
similarly minded economists that the causes of the banking crisis were primarily
“greedy bankers” and insufficient regulation of banks and financial markets.
In response to this big government solution, two other economists summed up
the problem in simple but powerful arguments: Professor Calomiris argues that a
necessary condition for a banking crisis is government policy that distorts the
micro-incentives of banks. Professor Posner adds that banks that got into
financial trouble were simply taking the “risks that seemed appropriate in the
environment in which they found themselves.”
The White House and Congress took actions to help and/or to punish banks with
financial problems. Assuming these actions reflected political “best
intentions,” banks will nonetheless have to continue to work within the
“unintended consequences” of these political decisions over markets. Banks will
continue to have to deal with imposed “distorted micro-incentives” by taking
risks they deem appropriate in the environment they find themselves.
John A. Haslem
