Runs, Cascades, Squeezes, and Crises

Recent discussions about bank runs in economics has led me to the conclusion that economists want to lump practically all behaviour around default as a “run,” which is not helpful. In order to have a better grasp of the situation, we need to distinguish various possibilities — runs, cascades, squeezes, and good old fashioned financial crises.

The Markets Made Me Do It!

British Prime Minister sacked the Chancellor of the Exchequer (head of Treasury) Kwasi Kwarteng on Friday, and economic commentary was predictable. Variations of “markets force government to backtrack!” were abundant, and echoed by Labour Party supporters (which would be surprising for anyone unfamiliar with British politics).

Of course, this is a variant of the “bond/currency vigilantes” stories that neoliberals love, and so features prominently in market discourse.

Initial Comments On Sissoko Paper: Money Markets

I ran across Carolyn Sissoko’s working paper “Financial dominance: why the ‘market maker of last resort’ is a bad idea and what to do about it” (link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4240857). Although I agree that non-bank finance (“market-based finance”) is going to be the source of financial instability under current institutional arrangements in the developed countries, I am not too sympathetic with her framing of the issues. Private sector balance sheets have been tilted towards non-bank finance as a result of institutional and demographic trends, and the traditional banking system has been de-risked courtesy of banks relying on tools provided by non-bank finance.

Nobel* Prize Chatter

The Nobel* Prize for economics announced Monday resulted in the usual mainstream/heterodox mud slinging, reviving arguments about banking. The arguments that I saw confirmed my prior views that economist banking debates are largely pointless; the mainstream and post-Keynesian sides largely recite talking points past each other. Although I have obvious sympathies to the post-Keynesian side, the means of expressing the critiques have drifted into a stylised form that does not help anybody at this point.

Crisis, Pre-Crisis, Or No Crisis?

I divide the regimes for the global capital markets into three states: crisis, pre-crisis, and no crisis. The one term that is non-standard is pre-crisis; it is a state where something has gone horribly wrong in funding markets, but it is not yet well known and there is a hypothetical possibility of a full financial crisis being averted.

My “no crisis'“ state does not imply that we cannot find panicking people in the financial press. Unimportant markets like Magic the Gathering™️ cards, crypto, or equities might be blowing up, but as long as the funding markets are not touched, the effects on the real economy will be limited. Those markets are largely zero sum transfers of wealth between participants, and not used to raise funding for investment (fixed and inventory). Since we can always find an unimportant market blowing up somewhere, if we labelled them “financial crises,” we would be living in a permanent “crisis,” making the term meaningless.