In a speech in honor of Stanley Fisher: “The Crisis as a Classic Financial Panic”, Bernanke “incriminates” himself:
The recent crisis echoed many aspects of the 1907 panic. Like most crises, the recent episode had an identifiable trigger–in this case, the growing realization by market participants that subprime mortgages and certain other credits were seriously deficient in their underwriting and disclosures. As the economy slowed and housing prices declined, diverse financial institutions, including many of the largest and most internationally active firms, suffered credit losses that were clearly large but also hard for outsiders to assess. Pervasive uncertainty about the size and incidence of losses in turn led to sharp withdrawals of short-term funding from a wide range of institutions; these funding pressures precipitated fire sales, which contributed to sharp declines in asset prices and further losses.
Institutional changes over the past century were reflected in differences in the types of funding that ran: In 1907, in the absence of deposit insurance, retail deposits were much more prone to runs, whereas in 2008, most withdrawals were of uninsured wholesale funding, in the form of commercial paper, repurchase agreements, and securities lending. Interestingly, a steep decline in interbank lending, a form of wholesale funding, was important in both episodes.
Also interesting is that the 1907 panic involved institutions–the trust companies–that faced relatively less regulation, which probably contributed to their rapid growth in the years leading up to the panic. In analogous fashion, in the recent crisis, much of the panic occurred outside the perimeter of traditional bank regulation, in the so-called shadow banking sector.
The “trigger may have been identifiable” and other characteristics shared similarities. What was very different was the aftermath. The drop in spending and in real activity was much more acute in 1907, but by this time then they were enjoying sustained progress while we´re still mired in depressed conditions. That´s the aspect of the “classical financial panic” that Bernanke shies away from as “the devil from the cross”!
And what about prices, the fear that many have if the Fed becomes truly expansionary. They went up by as much over 100 years ago, so most of the gain then was real!
Also, as Bernanke recounts:
To satisfy their depositors’ demands for cash, the trust companies began to sell or liquidate assets, including loans made to finance stock purchases. The selloff of shares and other assets, in what today we would call a fire sale, precipitated a sharp decline in the stock market and widespread disruptions in other financial markets.
It appears QE3 ‘saved’ today´s market from suffering a resounding ‘beating’ from the market then!
What all this also tells us is that recoveries from financial crises need not be slow and protracted!
But I already knew Bernanke was a master ‘dodger‘!