james mcandrews : modern recipes for financial crises remarks by mr james mcandrews, executive vice president and director of research of the federal reserve bank of new york, at the university of iowa, iowa city, 4 december 2015. * * * original presentation is on the federal reserve bank of new york ’ s website : slides ( pdf ). the author wishes to thank tobias adrian and thomas eisenbach for helpful discussions and comments on the text of the speech. the views expressed are those of the author and do not necessarily represent the views of the federal reserve bank of new york or of the federal reserve system. introduction franklin delano roosevelt, in his first fireside chat on march 12, 1933, cogently explained the mechanisms that led to the complete collapse of the banking system in the united states earlier that month : “ first of all, let me state the simple fact that when you deposit money in a bank, the bank does not put the money into a safe deposit vault. it invests your money in many different forms of credit – in bonds, in commercial paper, in mortgages and in many other kinds of loans. in other words, the bank puts your money to work to keep the wheels of industry and of agriculture turning around. a comparatively small part of the money that you put into the bank is kept in currency – an amount which in normal times is wholly sufficient to cover the cash needs of the average citizen. in other words, the total amount of all the currency in the country is only a comparatively small proportion of the total deposits in all the banks of the country. “ what, then, happened during the last few days of february and the first few days of march? because of undermined confidence on the part of the public, there was a general rush by a large portion of our population to turn bank deposits into currency or gold – a rush so great that the soundest banks couldn ’ t get enough currency to meet the demand. the reason for this was that on the spur of the moment it was, of course, impossible to sell perfectly sound assets of a bank and convert them into cash, except at panic prices far below their real value. by the afternoon of march third, a week ago last friday, scarcely a bank in the country was open to do business. proclamations closing them, in whole or in part, had been issued by the governors in almost all the states. it was then that i issued the proclamation providing for the national

com / 2008 / jul / 12 / business / fi - indymac12. recently, a group of economists agreed to and published a “ consensus narrative ” of the causes of the eurozone financial crisis, focusing on the external imbalances across countries within the eurozone, which led to a sudden stop in lending, and the flow of capital, across those countries. see http : / / www. voxeu. org / article / ez - crisisconsensus - narrative and http : / / www. voxeu. org / content / eurozone - crisis - consensus - view - causes - and - fewpossible - solutions. bis central bankers ’ speeches 1 ) significant signs of financial distress in the banking system ( as indicated by significant bank runs, losses in the banking system, and / or bank liquidations ) 2 ) significant banking policy intervention measures in response to significant losses in the banking system. to be clear, and to apply this definition to the u. s. crisis in 2007 – 09, i ’ ll expand it from the banking system to the financial system more broadly, as many financial firms that experienced distress during the most recent crisis weren ’ t licensed as banks. it may seem odd to include policy interventions to be counted as a sign of a financial crisis, but when deposit insurance and lender of last resort services are available, a crisis may not kick off a bank run. that means the government must intervene to keep the stress from worsening, and so extraordinary action by the government can itself be a gauge of the severity of a crisis. laeven and valencia review the frequency of financial crises around the world and count 147 crises since 1970. what problems are caused by a financial crisis? the clearest outcome of a financial crisis is a loss of output – in other words, a severe and long - lasting recession. using the same dataset they used to identify crises, laeven and valencia found that in advanced - economy nations, the median cumulative decline in output accompanying a financial crisis was 33 percent of annual gross domestic product, or one - third of an economy ’ s output for a year. in addition, the median growth in government debt was 21 percent of gdp, and the median fiscal cost of the crisis - related spending was 3. 8 percent of gdp. other studies confirm these grim statistics. reinhart and rogoff ( 2009 ) point out that recoveries from financial crises are weaker and slower than recoveries from recessions that don