1/6
It's interesting that this Goldman report came out just as I was rereading the section on the 1931 Danatbank crisis in Niall Ferguson's (@nfergus) excellent book on Siegmund Warburg.
It's interesting that this Goldman report came out just as I was rereading the section on the 1931 Danatbank crisis in Niall Ferguson's (@nfergus) excellent book on Siegmund Warburg.
https://twitter.com/michaelxpettis/status/1404348204284485632
2/6
It's a pretty well-known story: In the late 1920s, in spite of rumors about its unstable balance sheet Danatbank was able to grow deposits to fund its questionable activities mainly because the bank was assumed to be too big to fail. Ferguson adds that this assumption had...
It's a pretty well-known story: In the late 1920s, in spite of rumors about its unstable balance sheet Danatbank was able to grow deposits to fund its questionable activities mainly because the bank was assumed to be too big to fail. Ferguson adds that this assumption had...
3/6
been reinforced by the bailing out by the regulators of the smaller Warburg bank a few months earlier.
But when a run started on the Danatbank in June 1931, the regulators had no choice but to let it fail, which in turn caused the entire German banking system to collapse.
been reinforced by the bailing out by the regulators of the smaller Warburg bank a few months earlier.
But when a run started on the Danatbank in June 1931, the regulators had no choice but to let it fail, which in turn caused the entire German banking system to collapse.
4/6
The point is that they didn't let Danatbank fail because they had changed their mind about "too big to fail". The problem is that Danatbank had become too big to save. The regulators simply no longer had the resources – especially the fx – to prevent the calamity.
The point is that they didn't let Danatbank fail because they had changed their mind about "too big to fail". The problem is that Danatbank had become too big to save. The regulators simply no longer had the resources – especially the fx – to prevent the calamity.
5/6
That's the problem (and not just for China) with this mechanism, and one that Hyman Minsky describes: guaranteeing stability changes investor behavior in ways that automatically increase riskiness in the system, which only further increases the need to guarantee stability.
That's the problem (and not just for China) with this mechanism, and one that Hyman Minsky describes: guaranteeing stability changes investor behavior in ways that automatically increase riskiness in the system, which only further increases the need to guarantee stability.
6/6
At some point it becomes very difficult to know what to do. The regulators feel they cannot allow the system to break down, but if they prevent it from doing so, they just encourage the financial system to take on even more credit and balance-sheet risks.
At some point it becomes very difficult to know what to do. The regulators feel they cannot allow the system to break down, but if they prevent it from doing so, they just encourage the financial system to take on even more credit and balance-sheet risks.
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