A Post-Keynesian Approach
New Directions in Modern Economics series
Edited by Claude Gnos and Louis-Philippe Rochon
Chapter 2: Lessons from the 1929 Crash and the 1930s Debt Deflation: What Bernanke and King Learned, and What They Could Have Learned
Robert W. Dimand INTRODUCTION: TWO CENTRAL BANKERS WHO KNOW THE PAST, AND HOPE NOT TO REPEAT IT After a period in which hopes were confidently expressed that the growing pool of global liquidity had made the currency and banking crises of 1994 to 2002 (Mexico, East Asia, Brazil, Russia, Long Term Capital Management, Turkey, Argentina) a thing of the past, credit crunches in markets for collateralized debt obligations (CDOs), triggered by the crisis in the US subprime mortgage market, revived concerns about the fragility of the financial system and the stabilizing role of central banks. On August 9, 2007, when overnight interbank interest rates spiked after BNP Paribas halted withdrawals from funds holding illiquid mortgage-backed securities, the European Central Bank (ECB) injected €95 billion (US$131 billion), and the Federal Reserve System $24 billion,1 in additional highpowered money in discount-window lending in a single day, followed by a further €61 billion from the ECB and $38 billion from the Fed the next day (The Economist 2007a, p. 65).2 Moreover, on November 15, the Fed lent $47 billion in the overnight market in a single day (surpassing the previous record of $45.5 billion on September 12, 2001, to stabilize markets after the 9-11 terrorist attacks), while the Bank of Canada injected C$1.57 billion, its largest single-day injection since 2000 (Globe and Mail, ‘Central banks buttress shaky markets’, November 16, 2007). In mid-February 2008, the $330 billion US market for auction-rate notes3 abruptly became illiquid, without bids (Morgenson, 2008)...
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