By Arnold Kling
My recent research suggests that the ‘global banking glut’ may have been more culpable for the crisis than the ‘global savings glut’
I reported on his paper when I first read it (I believe Tyler Cowen spotted it for me, and Paul Krugman spotted it before that).
People can argue about whether we want to copy European countries with regard to health care policy or their long vacations or what have you. I challenge anyone to defend the European banking model, in which a few large banks dominate the financial sector and take large risks using short-term funding.
Along these lines, Morgan Ricks sneaks in a little bit of Austrian econ, bashing maturity mismatching in The New Republic.
Douglas Diamond, a University of Chicago economist and a leading theorist in this area, recently said that “financial crises are always and everywhere about short-term debt.” The recent crisis was no exception. In 2008, we witnessed massive runs on virtually all of the financial sector’s short-term IOUs, which go by odd names like “repo,” “asset-backed commercial paper,” and “Eurodollars.” This time, the public sector intervened on an awesome scale to stem the panic, with trillions in cash infusions and guarantees for the financial industry.
What you have in Europe, even more than in the U.S., are banks that have grown much too large, using these dangerous leverage techniques. As bad as the European fiscal crisis may be, the state of the European banks is perhaps even more precarious. See this Tyler Durden post on the high ratio of bank debt to GDP in various European countries, including the UK.
Er, have a nice day.