In this paper we discuss the lessons learned from the US banking panics in the 1930s for the response by the Federal Reserve to the crisis of 2008. We revisit the debate over illiquidity versus insolvency in the banking crises of the 1930s and provide empirical evidence that the banking crises largely reflected illiquidity shocks. In the recent crisis the Fed under Bernanke had well learned the lesson from the banking panics of the 1930s of conducting expansionary monetary policy to meet demands for liquidity. However, unlike in the 1930s, the deeper problem of the recent crisis was not illiquidity but insolvency and especially the fear of insolvency of counterparties. A number of virtually insolvent US banks deemed too big and too interconnected to fail were rescued by fiscal bail-outs.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics
- Management, Monitoring, Policy and Law
- Banking panics
- Too big to fail