stress test reflections on financial crises

[...]... expected that U.S taxpayers would pay an astronomical price to repair our nancial system, too Simon Johnson, a former chief economist of the International Monetary Fund, warned that the government’s price tag could be $1 trillion to $2 trillion, “in line with the experience” of other nations An IMF study estimated the nal tab at nearly $2 trillion “If we spent a million dollars a day every day since the birth... bank then lent out their money at a higher interest rate, con dent that everyone wouldn’t want their money back at the same time But when people lost con dence in a bank—sometimes because of rational concerns about its lending or leadership, sometimes not—they would all want their money back at the same time The result was a run on the bank, like the famous scene in It’s a Wonderful Life when depositors... Geithner needs is someone else treating him like a re hydrant.” And the outrage has endured Conventional wisdom still holds that we abandoned Main Street to protect Wall Street—except on Wall Street, where conventional wisdom holds that President Obama is a radical socialist consumed with hatred for moneymakers The nancial reform law that we wrote and pushed through a bitterly divided Congress after the... widows—so they rush to pull it out of the system, which makes the money remaining in the system even less safe, which makes everyone even less con dent This has happened a lot throughout history, in rich countries and poor ones, in sophisticated systems and simple ones Human beings are prone to panics, just as we are prone to the kind of irrational con dence (in real estate, or stocks, or seventeenth-century... explain The centerpiece of our approach was a stress test, ” which sounded more like analysis than action Regulators would delve into the books of major nancial rms to calculate how much additional capital they would need to survive a truly catastrophic downturn, just as doctors stress- test patients to see how their bodies would respond to strenuous conditions The rms would then be required to raise enough... SHOWS that even modest financial crises cause horrific pain One study of fourteen severe twentieth-century crises found that, on average, the unemployment rates in the a ected countries jumped 7.7 percentage points Many of them ended up nationalizing most or all of their banking systems Financial crises have also been exorbitantly costly for taxpayers The direct scal costs—just the money that governments...EVERY FINANCIAL crisis is a crisis of confidence Financial systems, after all, are built on belief That’s why the word credit is derived from the Latin for believe, why we say we can “bank” on things we believe true, why nancial institutions often call themselves “trusts.” Think about how a traditional bank worked Depositors entrusted it with their money, con dent it could repay them... depositors rush to pull their money out of a Depression-era savings and loan Con dence is a fragile thing When it evaporates, it usually evaporates quickly And it’s hard to get back once it’s lost A nancial crisis is a bank run writ large, a run on an entire nancial system People lose con dence that their money is safe—whether they’re stockholders or bondholders, institutional investors or elderly widows—so... rules since the Depression, is widely viewed as too weak, except in the financial world, where it is described as an existential threat Those perceptions are partly my fault, failures of communication and persuasion I’m proud of most of the decisions we made to try to save the economy And I’m under no illusions that better marketing or better speechmaking could have made those decisions popular That said,... misperceptions that have been entered into that record, and give a sense of what it was like in the fire There is another reason I’m writing this book Financial crises are perilous, and this won’t be the last one Yet the United States has no standing army for fighting financial wars, no Joint Chiefs of Staff, no War College It also has no playbook All nancial crises are di erent, but they have a lot in common, . Crown colophon are registered trademarks of Random House LLC. Cataloging-in-Publication Data is on file with the Library of Congress. ISBN 97 8-0 -8 04 1-3 85 9-8 eBook ISBN 97 8-0 -8 04 1-3 86 0-4 Jacket. I didn’t feel very confident. EVERY FINANCIAL crisis is a crisis of confidence. Financial systems, after all, are built on belief. That’s why the word credit is derived from the Latin for believe,. “We’re Going to Fix This” SEVEN: Into the Fire EIGHT: Plan Beats No Plan NINE: Getting Better, Feeling Worse TEN: The Fight for Reform ELEVEN: Aftershocks EPILOGUE: Reflections on Financial Crises TRIBUTE