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The Money ProblemRethinking Financial Regulation$
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Morgan Ricks

Print publication date: 2016

Print ISBN-13: 9780226330327

Published to Chicago Scholarship Online: September 2016

DOI: 10.7208/chicago/9780226330464.001.0001

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(p.102) Chapter Four Panics and the Macroeconomy

(p.102) Chapter Four Panics and the Macroeconomy

(p.102) Chapter Four Panics and the Macroeconomy
The Money Problem

Morgan Ricks

University of Chicago Press

This chapter argues that panics—widespread redemptions of short-term debt—should be viewed as the central problem for financial stability policy. This is not a novel argument, but it is a surprisingly controversial one. It is common today to see panics as mere symptoms or manifestations of other, purportedly more “fundamental” problems: “debt-fueled bubbles,” “overleverage,” “excessive risk-taking,” and so on. The chapter makes the case that these other phenomena are unlikely to pose a grave threat to the broader economy in the absence of a panic. The chapter adduces evidence from the recent financial crisis and the Great Recession, and from previous historical episodes, in support of this position. The chapter focuses on a particular mechanism through which panics damage the broader economy—the “panic-induced financing crunch”—and it suggests that financial market anomalies during the recent crisis provide dramatic evidence that this mechanism was at work. The chapter concludes that panic-proofing, as opposed to, say, debt-fueled bubble prevention or “systemic risk” mitigation, should be the main objective of financial stability policy.

Keywords:   panics, short-term debt, financial crisis, Great Recession, bubbles, financial crises, systemic risk

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