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All Fall Down

Debt, Deregulation and Financial Crises

Jane D’Arista

All Fall Down traces the ways in which changes in financial structure and regulation eroded monetary control and led to historically high levels of debt relative to GDP in both developed and emerging economies. Rising stocks of debt drove the global financial system into crisis in 2008 when households, businesses, financial institutions and the public sector in some countries strained to generate sufficient income for debt service. The stagnation and fall in asset prices that followed began the process of unwinding that led to a run on the financial sector by the financial sector.
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Index

Jane D’Arista

accountability 202

AIG 44–5, 58

anti-trust laws 7–8, 58

Argentina 117

Asian financial crisis (1997) 99, 102, 110, 116–19

asset bubbles 38, 113, 127, 143, 182

asset concentration 64, 66, 68–9, 78, 80, 156

asset prices 6, 12, 51, 56, 61, 77, 97, 107, 128–9, 140, 143, 159, 165, 180, 182, 194, 196, 209

Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility 158

asset-backed securities 45, 48, 58, 135

asset-based reserve requirements 152, 161, 165, 167–8, 171–4, 177, 179

ATMs 147

Australia 102

bailouts 44–5, 79, 128, 188, 195

balance of payments accounts 9, 10, 21–2, 92, 94, 117

balance sheet 4, 7, 12, 14, 26, 31, 37–8, 43, 52, 58, 60–62, 70, 77, 85, 93, 100, 107, 109, 146, 153, 157, 161, 166, 168–74, 176–9, 187, 194, 201, 205–6, 212, 214, 222

Bank for International Settlements 5, 14, 25, 37–8, 44, 53–6, 61, 77, 95–6, 107–9, 116–17, 122–3, 141, 143, 151, 165, 195–6, 219, 222

Fisher II working group 62

Bank Holding Company Amendments 30, 67

Bank of America 44

Bank of England 21, 73, 94, 159

Bank of Japan 159

Bank of Mexico 113

bank-based systems 2–4, 13, 17, 34, 37, 44, 160, 169, 172, 180, 193

Banking Act (1935) 155, 166

bankruptcies 34, 44, 55–6

Barings 27

Basel Agreement 153

Basel Capital Accord 53

Basel Committee on Banking Supervision 24–5, 61

Basel II 62, 73

Basel III 153

Bear Stearns 44, 54, 58–9, 66, 77, 128

Bernanke, Ben S. 128, 159–60

bidding wars 134

borrower of first choice 103

Brazil 117–19, 196

Bretton Woods 15–16, 22, 168, 187, 192, 194, 200–201, 204, 214–15, 222

Brimmer, Andrew 152

Burns, Arthur 27, 69

buyer of last resort 2, 16, 103

Canada 114–15, 193

capital accounts 10–11, 93, 112

capital flows 2, 11, 15, 22, 25, 93–4, 101–2, 107, 113, 115, 117, 143–4, 149, 155, 167, 181–2, 187, 192, 194, 196, 209, 213

capital ratios 13, 73, 153

capital requirements 6–7, 12, 24–5, 47, 53, 62–3, 69, 72, 77–8, 111, 127, 142, 150–55, 177, 182

carry trade 8–9, 11, 53, 123, 129, 143–4

Carter, Jimmy 142

CATO Institute 96, 107

central banks 5–6, 11, 13, 15–16, 21–4, 34, 37, 53, 55, 65, 79, 94, 98–100, 108–10, 115, 122, 127–30, 140–41, 143, 145–7, 149–50, 154–5, 157, 160, 165–9, 171, 174, 177, 179–81, 189–90, 194–5, 200–206, 209–14, 222–3. See also Federal Reserve

certificates of deposit 23, 29–31

Chile 118, 196

China 101–2, 116–17

Citigroup 44

clearing houses 26, 45, 59, 200–201

Clinton, Bill 195

closed-end fund 197–9

collateralized debt obligations 6, 43, 53, 60, 66, 122–3

Colombia 118

Commerce Department’s Bureau of Economic Analysis 92, 121

commercial banks 5, 32, 53, 60, 77–8, 82, 149, 202, 204–5, 207, 211–13

commercial paper 4, 8, 29–33, 51–2, 59–61, 65, 139, 147, 157–8, 171, 202, 204

Commission of Experts of the President of the UNGA on Reforms of the International Monetary and Financial System 190–91, 223

Commodities Futures Trading Commission 61

Community Reinvestment Act 32

competitiveness 24–5, 32, 79, 95, 146

Comptroller of the Currency 6, 54, 75

concentration 7–8

conflicts of interest 7, 35, 43, 48–9, 72, 86

Congress 7–8, 24, 46, 48, 80, 128, 130, 142, 161, 173, 196

Consumer Financial Protection Bureau 74

Continental Illinois Bank 8, 30, 65, 157

contingency lending 4, 29–30, 59–60, 62

corporate bonds 135, 171, 181

corporate governance 35–6, 85–6

countercyclical policy 12–14, 16–17, 23, 34, 37, 127, 144–50, 154–5, 161, 165–7, 170, 178, 182, 191, 194, 200, 222–3

Credit Control Act (1980) 142, 152

credit crunches 22–3, 178, 182

credit default swaps 6–7, 43, 45, 53, 56, 58, 66, 122

credit freeze 127

credit markets 7, 24, 30, 32, 38, 44–6, 48, 72, 76, 113, 115, 132, 134, 136–7, 142, 150, 161, 179

credit rating agencies 7, 48–9, 139

creditworthiness 56, 139, 166

cross-border flows 11, 15, 94, 144, 150

cross-border loans 116–18

cross-border payments 201, 204

cross-border transactions 1, 93, 123, 193, 200, 203, 222

Crotty, James 54–5, 73, 79, 219

currency manipulation 92

current accounts 11, 16, 95, 100, 102–3, 108–9, 111, 123, 137, 149–50, 195, 198, 200

Daiwa 27

DAX 117

debt bubble 127–31, 137–41

debt-fueled growth 1–2, 17

deflation 97, 109, 143, 178, 203

delinquency rates 139

democratization of stockholding 138

Department of Labor 86

deposit insurance 5, 21, 23–4, 30–31, 39, 67, 82–3

deregulation 2, 5, 12, 23, 25, 43, 60, 77, 91, 110, 127, 142, 151, 165, 169, 222

disclosure 73

discount window operations 27, 29, 147–8, 157

disinflation 128, 159

diversification 68–9, 85, 156

Dodd, Christopher 76

Dodd-Frank Act (2010) 2–3, 9, 49, 59, 61–2, 72–6, 78, 81, 153

dollar (US) 1, 10–11, 22, 53, 98, 111, 115–16, 121, 123, 141, 187–9, 193–4, 203, 214, 221–2

dollar crises 94, 187

dollar glut 214

dollar hegemony 10, 91–7

dollar reserves 11, 16, 21, 24, 98–9, 121, 150, 214

due diligence 48, 74

dumping 92

Economist 96, 107

education 38, 121

efficient markets hypothesis 127

Emergency Relief and Construction Act (1932) 148

Employee Retirement Income Security Act (1974) 4–5, 34–5, 66, 86

Enron 86

Epstein, Gerald 73

euro 2, 51, 53, 98, 101, 107, 115–16, 123, 143, 189–90, 203, 214

Eurobond market 112

Eurocurrency market 21–5, 27, 94, 130, 205

Eurodollar market 11, 21, 23, 46, 187

Euromarkets 23, 25

European Central Bank 98, 159

European Community 25

European Currency Unit 189, 214

European Monetary System 189, 193

European Parliament 62

European Union 2, 62–3

exchange rate 10, 22–5, 66, 92, 95–7, 113, 117–18, 191, 195–6, 201, 204, 208–9, 221

exorbitant privilege 93

export barriers 92

export-led growth 1–2, 12, 15, 17, 103, 107, 223

Fannie Mae 10, 36, 44, 46–7, 98–9, 111, 116, 177

Federal Deposit Insurance Corporation 9, 31–2, 65, 67–8, 79

Bank Insurance Fund 31

Federal Deposit Insurance Corporation Improvement Act (1991) 8

federal funds rate 149, 160, 173

Federal Reserve 4–9, 13–15, 21–2, 24–5, 27, 29–30, 32–3, 38, 43–6, 51–5, 61, 65–6, 69, 76, 80, 85, 93, 99, 108, 121, 127–30, 132–3, 136, 138–49, 151–2, 155–62, 166–9, 171–4, 176–82, 195–6, 220–22

Federal Reserve Act (1913) 145–7, 155

Federal Reserve System 128, 145–8, 155

fiat currency 204

financial crisis (2007–2008) 1–3, 5, 11, 13–15, 27, 37, 43, 48–9, 51–2, 54, 58, 61, 64–6, 69, 72, 78–9, 82, 93, 97–8, 100, 127–8, 137, 140, 151, 154–5, 157, 166, 178, 188, 203, 215, 219–20, 222

financial guaranty programs 79, 83–5

Financial Stability Forum 59, 61, 73

First World War 148

Ford Motor Company 29

foreign exchange reserves 10, 91, 94, 98–103, 121, 172, 174, 188–9, 191, 203, 221. See also international reserves

foreign investment 11–12, 97, 100, 113, 121, 130, 132, 135–6, 139, 141, 150, 181, 192, 195, 198, 220–21

France 98

Franklin National Bank 8, 27–8, 52

fraud 86

Freddie Mac 10, 36, 44, 46–7, 98–9, 111, 116

free market ideology 5, 13, 131, 151, 165, 222

FTSE 100117

Geithner, Timothy F. 61

General Electric Capital Corporation 29

General Motors 29, 34

Germany 22, 27, 98, 102, 117, 193

Ginnie Mae 46

Glass-Steagall Act (1933) 5, 32, 43, 51, 54, 68, 71, 80, 148

global greenbacks system 190

globalization 9, 21, 91–2, 108

gold 93–4, 146, 148, 187–8, 194, 204

government securities 16, 22, 24, 83, 98–9, 116, 118, 139, 148, 171–4, 176, 197, 201, 208–9, 211–12

government-sponsored enterprises 10, 33, 36, 44, 46–8, 98–9, 111, 116, 132, 134–5, 137, 139, 171, 181

Gramm-Leach-Bliley Act (1999) 54, 68, 167

Great Depression 6, 16, 69, 82, 159, 161, 166

Great Recession 97, 166, 220

Greece 123

Greenspan, Alan 69, 96–7, 107–8, 128, 140, 142–3, 149

gross domestic product 2, 12, 17, 54, 69, 76, 95–6, 98, 101–2, 113–15, 119, 121, 130, 193, 195, 201, 219–20

Group of Thirty 61–2, 77–9

haircuts 13, 15

hedge funds 62–3, 73, 77, 116, 121, 161, 194

Herstatt 27

higher capital requirements 72–3

holding companies 30–31, 43, 60, 65–6, 157

home bias 108

hot money 194

House and Senate Banking Committees 47

House Committee on Banking and Financial Services 78

House of Representatives 77

household borrowing 11, 71, 132

household debt 17, 38, 44, 69, 121, 129–30, 133, 138, 141

household savings 9, 34, 44, 49, 73–4, 82–3, 107, 109

housing bubble 7, 49, 55, 69, 99, 129, 134, 140, 168

housing prices 6, 51, 137–8, 140

housing sector 22, 46, 48, 137, 141, 168, 180

Humphrey-Hawkins report 130

Iceland 54

India 101

individual retirement accounts 36–7, 39, 83, 86

Indonesia 117

inflation 11, 13, 23–4, 31, 94, 107, 110, 114, 128, 142, 147, 152, 159, 165

innovation 2, 4, 15, 29, 43, 46, 58, 91, 153, 197

insolvency 31, 153, 158, 161

institutionalization 112

insurance 59–61, 65

companies 71, 82, 112, 167, 171

deposit insurance 5, 21, 23–4, 30–31, 39, 67, 82–3

funds 24, 67, 82–3, 86

regulation 168

interbank market 11, 27, 116

interconnectedness 8–9, 43, 51–6, 62, 72, 75–7

interest rate 5, 8, 11, 21–2, 24–5, 29, 31–2, 38, 46–7, 52–3, 55, 58, 66–7, 75, 97, 109–10, 113, 122–3, 130, 132–3, 136, 138, 140–41, 143–6, 148–50, 158–61, 180–82, 193–5, 209, 221. See also federal funds rate

interest rate ceilings 21, 23, 29, 46–7, 67, 142, 146, 151

International Bank for Reconstruction and Development. See World Bank

international banks 11, 97, 110–12, 116–18, 192

international clearing agency 16, 200–14, 222

International Monetary Fund 15–16, 24, 38, 53, 111, 122–3, 141, 188–91, 196, 201, 214, 220–21, 223

international reserves 16–17, 98–100, 121, 173–4, 181, 188–9, 195, 198, 200–201, 205–14, 221–2. See also foreign exchange reserves

investment banks 5, 8, 47, 52, 54, 77, 80, 149, 158, 171

IRS 86

Isaac, William 68

Italy 98

Japan 53, 68, 102, 107, 109, 116–17, 123, 143–4, 159, 193

JPMorgan Chase 59, 177

Kaldor, Nicholas 10, 94–5, 200

Kaufman, Henry 47–8

Keogh plans 86

key currency 1, 16–17

Keynes, John Maynard 16, 188, 200

King, Mervyn 160

Kohn, Donald L. 159–60

Korea 116, 193

labor unions 85

Latin America 99–100, 110–19

Lehman Brothers 3, 7, 44–5, 55–6, 58, 66, 160

lender of last resort 15–16, 30, 33, 60, 128, 147–8, 158, 161, 171, 182, 201, 211, 213

lending limits 25, 37, 81

letters of credit 29, 59

leverage 3, 6, 8–9, 32, 43, 51–2, 54–5, 62–3, 69, 72, 76–8, 122–3, 134–5, 143, 151, 153, 156, 161, 165, 169, 202, 220

Levy Economics Institute 220

liberalization 25, 101, 119, 196

liquidity 6, 11, 23, 25–7, 37–8, 53, 55–6, 58, 62, 77–9, 93–4, 109, 121–4, 127, 129–30, 142–5, 147–8, 150, 154–6, 158, 160–61, 165, 168, 174, 178, 180, 188, 203–4, 206, 209, 211–12, 220

loan-to-value ratios 74, 142, 151, 165

London Interbank Offered Rate 27

Long-Term Capital Management (LTCM) 52–3, 62, 77, 116

macroprudential policy 13, 74, 78, 87, 127, 142, 150–52, 155, 160, 165, 222

Madoff Ponzi scheme 43

market-based systems 3–5, 13, 17, 28, 34, 44, 46, 160, 193

Marshall Plan 187–8

Martin, Preston 47

Matthews, Nicola 158

McChesney Martin, William 69, 145

McFadden Act (1927) 67

mergers and acquisitions 66–7, 79, 134

Met Life 177

Mexico 110, 112–19, 144, 193–6

Minsky, Hyman 44, 151

Monetary Control Act (1980) 46–7, 142

Monetary Policy Report to Congress 138

money market mutual funds 30–32, 61, 83–4

Moody’s 139

moral hazard 28, 84

mortgage lenders 32–3, 36, 48, 52, 54, 68, 134, 151, 167–8

mortgage lending 168–9

mortgage-backed securities 5, 7, 14, 33, 43, 47–9, 52, 56, 58, 69, 73–4, 99, 135, 159, 169, 171, 181

mortgage-related derivatives 169

mortgages 7, 36, 46–7, 68–9, 71–4, 133–40, 169, 171, 173

sub-prime mortgages 48–9, 52

mutual funds 7–8, 15, 34–6, 38, 44, 66, 84, 112–13, 138, 158, 169, 171, 180, 194, 197

NASDAQ 141

National Bank Act (1865) 6, 53, 68–9, 75, 151

National City Bank 29

New Deal reforms 69

Nixon, Richard 93, 187

North American Free Trade Agreement 114–16

Ocampo, José Antonio 119

off-balance sheet 4, 24, 52, 58, 60–62, 76–7, 129, 147, 177. See also shadow banks

Office of Financial Research 151–2

oil prices 23, 194

opaque markets 5–6, 26, 58–63, 165

Open Market Committee 159

open market operations 14, 24, 46, 127–8, 146, 148–51, 157, 161, 171–2, 176–7, 179–80, 201–2, 211–13

open-end funds 197

Organisation for Economic Co-operation and Development 36, 112, 193

Organization of Petroleum Exporting Countries 11, 23, 110–11, 192

over-the-counter derivatives 4–5, 7, 26, 43–5, 55–6, 58–61, 122, 197

Palley, Thomas 161, 167–8

parallel banking system 31

Penn Central Railroad 4, 29

pension funds 5, 7–8, 15, 34–9, 44, 73, 82–7, 112–13, 133, 135, 138, 167, 171, 180, 192, 194, 197

peso 114, 118, 195

Pollin, Robert 160

portfolios 25–6, 33, 36, 46, 48, 60, 85, 99, 112–13, 118, 174, 180–81, 192–5, 197–8, 203

Portugal 102

pound sterling 94, 96, 98, 203

poverty 11

Primary Dealer Credit Facility 158

private banks 94, 145, 194

private sector 2, 10, 100, 109–10, 130, 132, 143, 173, 178, 188, 190, 205

privatization 16, 26, 29, 96, 191, 193–4

proprietary trading 8–9, 52–3, 72, 76–8, 129

public sector 16, 33, 60, 94, 130, 195, 197, 200, 202, 204, 213, 222

purchasing power parities 101

quantitative easing 14, 149, 152, 158–61, 220–22

Reagan, Ronald 12

real 118

recession 53, 91, 97, 107, 109, 112, 116, 122, 130–33, 135, 137–40, 144, 157, 162, 166, 178, 194–5, 214, 220. See also Great Recession

renminbi 98

reporting requirements 60, 62

repos 5, 14–15, 51–2, 54, 75–6, 123, 135, 147, 152, 155, 161, 171–4, 176–9, 181–2

reverse repos 51, 75, 179

repurchase agreements. See repos

reserve accounts 146, 155, 166, 173, 177, 179, 181, 201, 204–6, 209, 211

reserve balances 98, 148–9, 155–6

reserve currency 93, 96, 98, 189–90, 203, 222

reserve requirements 5, 14, 21, 23–5, 32, 37, 43, 54, 76, 127, 130, 142, 145–7, 150, 152, 155, 161, 165–71, 173, 178, 180, 195–6

asset-based reserve requirements 152, 161, 165, 167–8, 171–4, 177, 179

restructuring 64

retirement savings 35–6, 38, 81–4, 86, 133. See also pension funds; individual retirement accounts

Reuss, Henry S. 27

reverse repos 51, 75, 179

Rio Agreement 188

round tripping 23–4

round-robin strategies 122, 150, 221

rules of the game 204–5

Russia 52, 116, 196

S&P 500117

savings institutions 46, 82

Secondary Mortgage Market Enhancement Act (1984) 44, 47

securities 5, 26, 35, 38, 47–9, 52, 54, 65–6, 68, 71, 74–5, 82, 99, 112, 115, 130, 135, 146, 148, 158, 160, 166, 172–3, 177, 192–7, 201, 221

asset-backed securities 45, 48, 58, 135

government securities 16, 22, 83–4, 98–9, 116, 118, 139, 148, 171–4, 176, 197, 201, 208–9, 211–12

mortgage-backed securities 5, 7, 14, 33, 43, 47–9, 52, 56, 58, 69, 73–4, 99, 135, 159, 169, 171, 181

Treasury securities 10, 14, 95, 121, 135, 139, 148, 155–6, 159, 181

underwriting 68, 71

Second World War 21, 34, 93, 166

Securities and Exchange Commission 43

Securities Investors Protection Corporation 79

securities repurchase agreements. See repos

Securities Subcommittee of the House Energy and Commerce Committee 47

securitization 7, 24, 36, 44, 46, 48–9, 58, 69–70, 72–5, 134, 168–9

self-dealing 3

self-regulation 3

Senate Banking Committee 61, 142

September 11116

shadow banks 4, 62, 129, 161. See also off-balance sheet

short-termism 35

skin in the game 74

small businesses 7, 22, 32, 70, 84, 87, 133–4, 137, 139–40

Smithsonian Agreement 94

social security 9, 35–6

sovereignty 22, 93, 189, 202

Spain 61–2, 118

special drawing rights 15, 188–91, 198, 214

stagnation 122, 130, 178

sterilization 11

Stiglitz, Joseph 74, 190

stigma problem 158

stock exchange 197

stock markets 5

Strong, Benjamin 148

structured investment vehicles 60–62

sub-prime mortgages 48–9, 52, 69

surveillance 26–7

Survey of Consumer Finance 138

sustainable growth 9, 15, 141, 192

Switzerland 22

synchronous crisis (2002) 110, 117–19

taxation 9, 36–7, 80, 83, 151, 193, 220

tech stock crisis 129, 133, 140, 168

Term Auction Facility 158

Term Securities Lending Facility 158

tesobonos 195

Thailand 116–17

Thatcher, Margaret 193

Third World Debt Crisis 12, 194

thrifts 46–7, 71

TIAA-CREF 86

too big to fail 8, 28, 65–6, 68, 78–80, 84, 128

TOPIX 117

Toporowski, Jan 154

tourism 168

toxic assets 74

trade deficits 1, 10–11, 17, 92, 220

transparency 3, 5, 26, 43, 56, 58, 62, 73, 157, 202. See also opaque markets

Treasury 43, 66, 128, 141

Treasury bills 30, 46, 98

Treasury bonds 35, 111

Treasury securities 10, 14, 95, 121, 135, 139, 148, 155–6, 159, 181

Triffin, Robert 187–9

unemployment 23, 128, 158, 180

United Kingdom 14, 21, 96, 101, 159, 189, 193

United Nations 119

Value-at-Risk models 151

Venezuela 118

Volcker, Paul 9, 77–8

Voluntary Foreign Credit Restraint 21

wages 12, 97, 220

Washington Consensus 196

weights and measures 71

White, Harry D. 201

White, William R. 14, 160, 165

World Bank 192, 198

WorldCom 86

Wriston, Walter 29

yen 53, 98, 121, 123, 149, 187

Zedillo, Ernesto 195