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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

Chapter:
(p.102) Chapter Four Panics and the Macroeconomy
Source:
The Money Problem
Author(s):

Morgan Ricks

Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226330464.003.0005

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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