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Seven Possible Causes of the Next Financial Crisis
The great financial historian, Charles Kindleberger, pointed out in the 1970s that over several centuries, history showed there was a financial crisis about once every ten years. His observation still holds. In every decade since his classic Manias, Panics and Crashes of 1978, such crises have indeed continued to erupt in their turn, in the 1980s, 1990s, 2000s, 2010s, and again in 2020. What could cause the next crisis in this long, recurring series? I suggest seven possibilities:
The Next Housing Bust
The Supreme Court has determined that the Federal Housing Finance Agency (FHFA)—the regulator and conservator of the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac—was unconstitutionally structured because its director could only be removed from office for cause. The Court held in its June 23, 2021 decision that the constitutional issue could be resolved by striking the “for cause” language—leaving the FHFA in place, but headed by a director who could be removed from office at any time by the President.
The Rise (and Fall) of the Modern Bank of England
The notion of “an essentially contestable concept” means an issue which by its very nature can never be definitively settled, no matter how much brilliance is expended on it, and about which no logic or evidence can ever force disputing parties to agree. Thus, they are, in the words of Stuart Hampshire, “permanently and essentially subject to revision and question.” In short, the debate never ends. How many such essentially contestable propositions have we seen! Macroeconomics, like politics and philosophy, is full of them.
Fifty Years Without Gold
Fifty years ago, on Sunday evening, August 15, 1971, after crisis meetings with close advisers at Camp David, President Richard Nixon announced an historic decision in his “Address to the Nation Outlining a New Economic Policy.” It was by then clear that the United States might not have enough gold to meet its international commitment to redeem dollars. It was experiencing “the start of a run on the dollar.” Paul Volcker, then with the Treasury Department, reported to the President on gold losses. “Dollar dumping accelerated. France sent a battleship to take home French gold from the New York Fed’s vaults.” The French not unreasonably believed that the special status of the dollar gave it an “exorbitant privilege,” making it “monumentally over-privileged.” Already in the 1960s, French President Charles de Gaulle had ordered the Bank of France to increase the amount of payments in gold from the United States.
‘Biden Inflation’ made simple: Borrow from the Fed, take away from the rest of us
“What is the difference between banking and politics?” a pointed old witticism goes. “Banking is borrowing money from the public and lending it to your friends. Politics is taking money from the public and giving it to your friends.”
Why a Fed Digital Dollar is a Bad Idea
On July 19, the top-level President’s Working Group on Financial Markets met to address “the need to act quickly to ensure there is an appropriate U.S. regulatory framework in place” for stablecoins, a form of cryptocurrency backed by assets, often denominated in dollars. The meeting cited “the risks to end-users, the financial system and national security.” This is a pretty clear message from a group composed of the Secretary of the Treasury, the Chairs of the Federal Reserve, SEC, CFTC, and FDIC and the Comptroller of the Currency.