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Abstract

Three types of reasons for the current crisis have been raised in the literature: microeconomic reasons related to incentives and moral hazard problems; macroeconomic reasons related to the stability of the US economy; and reasons related to the policies of the Federal Reserve during the crisis. We shed light on the importance of these factors by studying the Baring crisis of 1890, which was similar to the 2008 collapse of Lehman Brothers in some important respects, yet was short-lived and did not spread globally. After illustrating the similarities between the two episodes, we argue that microeconomic problems such as lax banking supervision and moral hazard existed in both periods and are therefore unlikely to fully account for the different outcomes; the decision of the Bank of England to bailout Baring’s Bank differed from the Fed’s decision to allow Lehman Brothers to fail, but we suspect that this alone cannot be the sole explanation for the different outcomes; instead, we propose that the macroeconomic stability of the UK financial system “then” was much greater than that of the US financial system today; this element is, in our opinion, crucial for understanding the differences between the two crises. The evidence we provide lends support to macro-based views of the current crisis such as Jagannathan et al al. (2009), Obstfeld and Rogoff (2009) and Reinhart and Rogoff (2011).

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