Lessons from the financial panic of 1890

A University of California professor finds that the financial panic of 1890, involving the Argentine banks and the House of Baring, a British investment bank that held large amounts of Argentine debt, was nearly identical to the financial crisis of 2007-2008, and he concludes that governments will always be called on to bail out the financial markets from time to time.

So, what was true then is true now: financial  institutions tend to be too interconnected to fail. Thus, they will always be implicitly backed by the government. The key question, paraphrasing (economist Paul Krugman), is whether bankers can be appropriately regulated so that they do not abuse the privilege of government backing.

Sebastian M. Saiegh, professor of political science at the University of California, San Diego, notes the following similarities between 1890 and 2007-2008:

A devastating panic and run on the banks
Low interest rates
Mortgage-backed securities
Collateralized debt obligations
Counter-party risk
Bad regulation
Too-big-to-fail institutions
Government guarantees
A Main Street vs. Wall Street perspective
Greed and immorality
Bankers colluding with regulators
Insufficient bank capital and reserves


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