The Unexplored Causes of the Financial Crisis and the Lessons Yet to be Learned “Both o riginal and pe demon rsuasiv strates e, this b t h lessons at we s ook till have to learn importa from th is deva nt stating MARTI crisis.” N WOL F TAMIM BAYOUMI UNFINISHED BUSINESS i ii UNFINISHED BUSINESS The Unexplored Causes of the Financial Crisis and the Lessons Yet to be Learned TAMIM BAYOUMI YALE UNIVERSIT Y PRESS NEW HAVEN AND LONDON iii Copyright © 2017 International Monetary Fund All rights reserved This book may not be reproduced in whole or in part, in any form (beyond that copying permitted by Sections 107 and 108 of the U.S Copyright Law and except by reviewers for the public press) without written permission from the publishers Nothing contained in this book should be reported as representing the views of the IMF, its Executive Board, member governments, or any other entity mentioned herein The views expressed in this book belong solely to the authors For information about this and other Yale University Press publications, please contact: U.S Office: sales.press@yale.edu yalebooks.com Europe Office: sales@yaleup.co.uk yalebooks.co.uk Set in Minion Pro by IDSUK (DataConnection) Ltd Printed in Great Britain by TJ International Ltd, Padstow, Cornwall Library of Congress Control Number: 2017942755 ISBN 978-0-300-22563-1 A catalogue record for this book is available from the British Library 10 iv To Susan, Elisa, and Stefan For giving me joy and purpose v vi CONTENTS List of Figures Acknowledgements Introduction: The Needle (and the Damage Done) viii x PART I: ANATOMY OF THE NORTH ATLANTIC FINANCIAL CRISIS European Banks Unfettered US Shadow Banks Unleashed Boom and Bust 15 44 71 PART II: MISDIAGNOSING THE NORTH ATLANTIC ECONOMY A Flawed Monetary Union Intellectual Blinkers and Unexpected Spillovers A History of the International Monetary System in Five Crises 109 133 156 PART III: COMPLETING THE CURE Will Revamped Financial Regulations Work? Making Macroeconomics More Relevant Whither EMU? 185 207 229 Final Thoughts 250 Notes References Index 256 265 273 vii FIGURES Output losses were the highest in the Euro area periphery Output losses were mainly in the North Atlantic region Estimated output losses in Euro area crisis countries Euro area banking boomed after 1985 Investment banking in the Euro area core expanded rapidly after 1996 Most European bank mergers involved domestic agglomeration Euro area banks were largely national in 2002 Euro area mega-banks were already becoming too big to fail Mergers in the late 1990s completed the European mega-banks 10 Internal risk models led to thin capital buffers 11 Structure of Euro area banking in 2002 12 Regulated banking did not grow from 1980–2002 13 Securitization of mortgages boomed after 1980 14 Banks sold most mortgages via securitizations by 2002 15 Balance sheets of broker-dealers, the core of investment banks, exploded 16 Emerging national banks became increasingly important 17 GSEs and investment banks had thin capital buffers in 2002 18 Structure of US banking in 2002 19 The North Atlantic financial boom 20 Euro area bank assets grew rapidly after 2004 21 Investment banking grew in the Euro area core, expansion was more balanced in the periphery 22 Core Euro area banks expanded overseas 23 Euro area mega-banks grew rapidly after 2004 viii 11 34 34 36 38 39 39 40 42 63 64 65 66 67 68 69 72 87 87 88 89 FIGURES 24 Capital buffers of Euro area mega-banks thinned 25 Basel capital ratios became increasingly misleading 26 Private mortgage securitizations surged after repo collateral was widened in 2003 27 Foreign banks borrowed more cash via repos after 2003 28 Investment and national banks grew rapidly through 2007 29 Thinly capitalized banks faced more trouble over the crisis 30 The size and increase of the European banks stands out 31 From 1998 to 2008 the US went on a spending spree 32 The Euro area periphery went on a similar spending spree to the United States 33 Periphery bond yields converged to Germany's before the crisis 34 Investment spending surged in the Euro area periphery before the crisis 35 Residential spending drove higher investment 36 Investment spending was increasingly important in the US 37 US residential investment surged in the 2000s 38 US and Euro area periphery experienced similar house price booms 39 Falling US yields reflected inflows from emerging markets, European banks, and repos 40 US output growth stabilized after the mid-1980s 41 US international debt outflows are highly volatile 42 Crises are more costly for emerging markets 43 Global costs of crises rose with globalization 44 Debt outflows dominate in crises 45 Misery index for the major players in the crises 46 Euro area core bank assets have shrunk more than those in the periphery 47 Euro area core banks have pulled back from the periphery and the US/UK 48 Mega-bank assets have shrunk but remain a large component of the Euro area banking system 49 Euro area mega-banks have strengthened capital buffers 50 US commercial bank assets rose after the crisis, investment bank assets contracted rapidly 51 Private securitization has dwindled 52 Capital increased most for investment banks 53 Trade between initial EMU entrants expanded moderately 54 The US remains a more coherent currency union than the Euro area ix 90 91 92 92 93 94 96 98 98 99 100 100 101 101 102 103 140 159 176 176 177 181 200 201 202 202 203 204 205 239 242 272 REFERENCES Sachs and Wyplosz (1986): Jeffrey Sachs and Charles Wyplosz,“The Economic Consequences of President Mitterrand”, Economic Policy, April 1986, pp 261–322 Sandbu (2015): Martin Sandbu, Europe’s Orphan: The Future of the Euro and the Politics of Debt, Princeton University Press, Princeton, 2015 Schoenmaker and Véron (2016): Dirk Schoenmaker and Nicolas Véron (eds), European Banking Supervision: The First Eighteen Months, Blueprint Series Vol 25, Breugel Institute, Brussels, 2016 Securities and Exchange Commission (2003a): “Customer Protection—Reserves and Custody of Securities Delegation of Authority to the Director of the Division of Market Regulation”, Release No 34–47480, March 11, 2003, available at https://www.sec.gov/ rules/final/34–47480.htm Securities and Exchange Commission (2003b): “Order Regarding the Collateral BrokerDealers Must Pledge when Borrowing Customer Securities”, Release No 47683, April 16, 2003, available at http://www.sec.gov/rules/other/34–47683.htm Seidman (2000): L William Seidman, Full Faith and Credit: The Great S & L Debacle and Other Washington Sagas, Beard Books, Washington DC, 2000 Sherman (2009): Matthew Sherman, “A Short History of Financial Deregulation in the United States”, Center for Economic and Policy Research, Washington DC, July 2009 Shiller (2017): Robert J Shiller, “Narrative Economics”, presidential address delivered at the 129th annual meeting of the American Economic Association, January 7, 2017, Shin (2012): Hyun Song Shin, “Global Banking Glut and Loan Risk Premium”, IMF Economic Review, Vol 60, Issue (July 2012) pp 155–92 Short (2014): Philip Short, A Taste for Intrigue: The Multiple Lives of Franỗois Mitterrand, Henry Holt, New York, 2014 Simms (2013): Brendan Simms, Europe: The Struggle for Supremacy, from 1453 to the Present, Basic Books, New York, 2013 Skidelsky (2001): Robert Skidelsky, John Maynard Keynes, Vol 3, Fighting for Freedom, 1937– 1946, Penguin Group, London and New York, 2001 Stiglitz (2016): Joseph E Stiglitz: The Euro: How a Common Currency Threatens the Future of Europe, W W Norton, New York and London, 2016 Stock and Watson (2003): James H Stock and Mark W Watson, “Has the Business Cycle Changed and Why?”, in Mark Gertler and Kenneth Rogoff (eds), NBER Macroeconomics Annual 2002, Vol 17, MIT Press, Cambridge, MA, 2003 Svensson (2016): Lars E Svensson, “A Simple Cost-Benefit Analysis of Using Monetary Policy for Financial Stability Purposes”, in Olivier J Blanchard, Raghuram G Rajan, Kenneth S Rogoff, and Lawrence H Summers (eds), Progress and Confusion: The State of Macroeconomic Policy, MIT Press, Cambridge, MA, 2016 Tarullo (2008): Daniel K Tarullo, Banking on Basel: The Future of International Financial Regulation, Peterson Institute for International Economics, Washington DC, 2008 Véron (2013): Nicolas Véron, “Banking Nationalism and the European Crisis”, Blog Post, Bruegel Institute, Brussels, October 2013 Véron (2016): Nicolas Véron, “Breaking the Vicious Cycle”, Financial World, October– November 2016 Vestergaard and Retana (2012): Jokob Vestergaard and María Retana, “Behind Smoke and Mirrors: On the Alleged Recapitalization of Europe’s Banks”, Danish Institute for International Studies 2013:10, 2013 Werner (1970): Pierre Werner,“Report to the Council and the Commission on the Realisation by Stages of Economic and Monetary Union in the Community”, (Werner Report), October 1970, available online at the Archive of European Integration Wessel (2009): David Wessel, In FED We Trust: Ben Bernanke’s War on the Great Panic, Crown Business, New York, 2009 Wolf (2014): Martin Wolf, The Shifts and the Shocks: What We’ve Learned—and Have Still to Learn—from the Financial Crisis, The Penguin Press, London, 2014 INDEX Abe, Shinzo, 215–16 ABM AMRO (Dutch bank), 89 accounting standards, 95 Alaska (US state), 53 Amalienborg castle, Denmark, 118 Andreotti, Giulio, 128 Anglo-Irish Bank, 186 Argentina, 166 Asia financial crisis (1990s), 157, 171–3, 175 inflows, 171 asset prices and bubbles, 224, 226–7, 230 Australia banking system, 96–7 seeks to revive MAP, 217 Austria expansion in assets, 86 trade boost, 239 Baer, Gunter, 123 Bagehot, Walter, 138 Baker, James, 127 Balladur, Edouard, 122 Baltic region: banking crashes, 88 Banco Nazionale di Lavoro, 89 Banco Português de Negócios, 186 Bank of America (US bank) assets, 93 as national bank, 54, 66 as regulated bank, 45 strongly capitalized, 69 Bank Brussels Lambert, 35 Bank of England handles government finances, 138 stabilizes failing banks, 138 Bank Holding Company Act (US, 1956), 53 Bank for International Settlements, 110, 212 Bank One Corporation (US bank), 69 Bankers Trust (US bank), 35, 38 Bangkok International Banking Facility, 171 Bankia (Spanish bank), 186 Banking Act (US, 1933), 244 Bankruptcy Abuse and Consumer Protection Act (US, 2005), 74 banks accounting standards and practices, 95 borrowing rates, 138–9 capital buffers, 52, 66, 68, 78–80, 82, 89–90, 94–5, 180, 187–8, 190, 196, 198–9, 201, 204–6, 211, 251–2, 255 capital standards, 25–7, 41, 90 collateral in repo deals, 74–5 commercial and investment separated, 19, 27, 30, 58–9 deposits and loans, 63 dual system (US), 54–5 equity and total assets, 41 European interest rates, 98–9 failures and corrective action (US), 51–2 government support for, 244–5 herding, 174 internal discipline, 79, 83–4, 250–1 liquidity standards redefined, 188–9, 205 market opportunities, 254 and North Atlantic crisis, 133–4, 174 proposed union in Europe, 191–4 regulation in Europe, 19, 24–5, 136–7, 232, 243 risk models, 28–33, 40, 41, 43, 136 273 274 INDEX shadow (US), 44–5, 47–8, 52, 54–5, 59, 62–3, 71, 91, 95 system reformed after North Atlantic crisis, 186–91 US national (interstate), 53–4, 62, 66–7, 243 see also central banks Banque de France, 138 Barclays (UK bank) acquires Lehman Brothers postbankruptcy remnants, 186 backing, 67 competes with major US banks, 94 as LTCM creditor, 60 Baring Brothers (UK bank), 38, 138 Basel Committee on Banking Supervision and banking regulation, 10, 16, 25, 32, 40–1, 52, 57 and creation of Euro mega-banks, 77–8 on internal risk models and capital buffers, 250 and market risk, 42 and measures of capital buffers, 89–91 membership, 26–7 and repo market, 75 rules upgraded, 186–91 and US housing market collapse, 93 and voluntary regulation, 85, 136 Basel Accord, 26–8, 73, 78, 205 Basel Accord, 75, 77–86, 186 Basel 2.5 system, 186 Basel agreement, 187–9, 252 Basel 4, 189 BBVA (Spanish bank), 38, 42, 193, 201, 211 Bear Stearns (US investment bank) assets, 93 bankruptcy, 47 and European competition, 67, 94 as investement bank, 45, 67 lightly capitalized, 69, 95 merges, 85 as regulated bank, 195 rescued, 133, 150 and upgrading of Basel 2, 186 Belgium bank assets, 15 banking expansion, 33, 36, 38 banking system (2002), 42, 73 close economic ties with Germany, 240 debt ratio, 130 in European Coal and Steel Community, 111 and financial crisis, and investment banking, 86 and monetary union, 19, 115 trade boost, 239 Benelux countries (Belgium, Netherlands, Luxembourg), 168 benign neglect, 134, 146–51, 187 Berlin Wall: falls (1989), 127, 130, 169 Bernanke, Ben, 209 Better Regulation Action Plan (UK, 2005), 83 BIS, see Bank for International Settlements Bismarck, Prince Otto von, 112 Black Wednesday (Europe, September 16, 1992), 170 BNP Paribas (French bank) assets reduced, 201 competes with major US banks, 94 expansion, 16, 38–40, 42, 86 suspends Net Asset Value calculation, 2–3 BNP Paribas ABS EONIA, BNP Paribas ABS EURIBOR, Brandt, Willy, 116 Brazil debts, 165–6 exchange rate collapse (1999), 13 Bretton Woods break-up of system, 117–18, 147, 161–4, 168, 172–3, 175, 177, 253 conference, 9, 114, 116 fixed exchange rate system, 147, 158, 161–2 and monetary policy, 151 Brexit, 247 broker-dealers, 58–9, 62, 65–6, 74, 91, 197 see also investment banking; USA: shadow banks Brown, Gordon, 83 Bryan, William Jennings, 219 budgets: planning, 221 Buffet, Warren, 137 Bundesbank ceases support for pound and lira, 170, 179 on cooperation of fiscal and monetary policy, 219 and European exchange rate system, 119, 168 and European integration, 112, 116 and European monetary union, 122 and formation of European Central Bank, 125 Frankfurt location, 111 and German reunification, 169 on independence of European Central Bank, 24 raises interest rates, 128 Burns, Arthur, 165 Bush, George W., 213 business cycle, 141–2, 145, 208–9, 248 INDEX California: house price fall, 244 Canada banking system, 96 in Basel Committee, 27 and Louvre Accord, 149 Case Shiller house price index, 70 central banks and effect of inflation, 142, 146 failure to apologise for crisis, 253 and fiscal expansion, 212 independence, 218, 221–2 and inflation targeting, 215 and monetary policy, 143–4, 221–2 and quantitative easing, 210 responsibility for controlling macroeconomic fluctuations, 213 responsibility for delivering low inflation, 209 revive growth and inflation, 227 role, 138 see also European Central Bank Centre for Economic Policy Decisions, 125 Chaebol (South Korea), 172 Charlemagne, Emperor, 114 Chase Manhattan Bank (US bank), 54 Chemical Bank (US bank), 54 China currency depreciation, 172 Euro area trade with, 238 in G20 group, 150 investments in US, 252 joins World Trade Organization, 150, 238 rise as economic power, 151 Citigroup (US bank), 46, 54, 66 assets, 93–4 banking model, 90 low capital buffer, 95 as national bank, 54 rescued, 105 strongly capitalized, 69 collateralized debt obligations (CDOs), 3, 61–2 Collins amendment (US), 196 see also Dodd–Frank Act Commerzbank (German bank), 38, 41, 42 Commodity Futures Trading Commission (US), 56 Comptroller of the Currency (US) see Office of the Comptroller of the Currency Congressional Research Service (US), 85 Consolidated Supervision Entities (CSE), 85 Consumer Financial Protection Bureau (US), 196, 198 Consumer Protection Act (US, 2010), 195 275 Continental Illinois Bank and Trust Company (US bank) Bank of America acquires, 54 failure (1984), 26, 51 Copenhagen European leaders summit (1978), 118 copyright, 223 Council of Governors (Committee of Governors of the Central Banks; Europe), 116, 126 Cox, Christopher, 85 Credit Agricole (French bank), 38, 42 Credit Suisse First Boston (Swiss/US bank), 60, 167 Cummings, Christine, 28 currency unions, 235–43, 249 see also European Monetary Union Cyprus, 231 dealers see broker-dealers debt flows (international), 157–61, 178–81 debts: repayment, 211 Declaration of Strengthening the Financial System (G20, 2009), 185 Delors, Jacques advocates strong franc, 120 Committee and Report, 24, 110, 114, 117, 121–7, 132, 153, 169 and common currency, 19 as President of European Commission, 18 Denmark accepts Basel capital rules, 127 and currency fluctuations, 117 invited to join European Economic Community, 115 rejects European Monetary Union, 128, 169–70 in Scandinavian monetary union, 114 Depository Institutions Deregulation and Monetary Control Act (US, 1980), 47 deposits: uninsured, 68 derivatives, 60, 196 Deutsche Bank (German bank) assets reduced, 201 backing, 67 branches abroad, 20 and capital buffers, 191 capital ratios, 90 competes with US major banks, 94 expansion, 35, 39–41, 42, 86, 88 international scope, 193 power, 16, 168 under pressure to accept reform, 186 276 INDEX Deutsche mark appreciates against dollar, 163–4 dominance, 117–18, 120 revalued, 120 Dexia (French/Belgian bank), 38, 42, 90, 186, 201 Dodd–Frank Act (US, 2010), 185, 189, 195–6, 213 Doha round of trade talks (2001), 150 dollar appreciates (early 1980s), 161 devalued, 149 and fixed exchange rate system, 147, 161 as central currency, 114 oil priced in, 165 value pegged to gold, 162–4 Draghi, Mario, 191, 231, 233 Duisenberg, Wim, 123, 126 dynamic stochastic general equilibrium models (DSGE models), 143–5, 148, 152–4, 222 East Germany: Ostmarks converted to Deutsche marks, 128, 169 eastern Europe and labor market, 247 trade with Euro area, 238–40 economic models distort policymaking, 151–5, 207 see also dynamic stochastic general equilibrium models ‘Economists’ (Euro area): differences from ‘Monetarists’, 112, 115–16, 124, 130, 235 efficient market hypothesis, 134–40, 146 Eichengreen, Barry, 240 Emergency Home Finance Act (US, 1970), 49 Emminger, Otmar, 116 employment: and fiscal and monetary policy, 147 Euro area (and Europe) accepts Basel framework, 189 bank assets reduced since 2008, 200–1 bank internal risk models, 190, 245 bank lending expansion, 250 bank resolution system (2014), 193 banking system expansion and transformation (1985–2002), 15–16, 33–5, 96–7 banking system in 2002, 42–3, 199 banking system shrinks since 2009, 200 and banking union, 185 banks fund US housing bubble, 93 banks under ECB supervision, 205 banks’ overseas expansion, 86–8, 95, 102–3 bond yields, 99, 103 borrowing rates converge, 138–9 business cycles, 248 capital gains, 103 causes of financial crisis, 105–6 causes of regional separation, 242 centralized bank regulation and support, 24–5, 232, 243–4, 252 core and periphery banks, 72–3, 86–9, 139 debt breaks, 245–6 depression, 230 domestic (national) banking, 37–8 early national banking system (1980), 16 effect of post-crisis changes on banks, 199–202, 208 and exchange rate instability, 170 failure to achieve integrated banking, 42 financial reform in, 250 fiscal deficits limited, 233, 245–6, 249 fiscal policies tightened, 155 foreign banks in, 17 foreign trade, 238–9 growth forecasts, 215 house prices, 100–2, 105 inadequate fiscal buffers, 245–6, 252–3 inflation rates, 214 institutional changes, 231–4 internal exchange rates, 117–19 investment spending, 99–100 labor markets and migration, 246–7 lends to US, 84, 173 limited support for troubled banks, 133 mega-banks, 8, 15, 31–2, 37–41, 71, 84, 96, 190, 201–2, 229, 252 member countries, 111 monetary (currency) union, 109–14, 126, 153, 229, 236–8, 240–3, 249 move to banking union, 191–4, 213, 230 move to economic integration, 111–12 need for area-wide bank support system, 206 and origins of World War I, outflows, 156, 171 output losses, 5–6, 11 overbanked, 206 political divisions, 236 post 2002 financial boom, 199 product market, 246–8 and proposed leverage ratios, 189–91 residential spending, 100 resolution fund for insolvent banks, 232 responsibility for macroprudential policies, 211 single currency, 109–10, 112, 130–2, 169, 235 INDEX spending boom, 97–8 stock market fall from 2007, 3, 86–9 surveillance of members reduced, 129–30 trade balance, 148 universal bank expansion in US, 70, 84 unprepared for crisis, 133 Euro (currency) as boost to integrated economy, 235, 237–8 introduced (1999), 98, 138–9, 229, 254 European Banking Authority (EBA), 190 European Central Bank (ECB) agreed by Delors Committee, 122–5 aided by expansion, 229 and bank supervision, 24–5, 232, 243 committed to low inflation, 216 effect of, 208 financial supervision centralized in, 231 and Greek debt crisis, 233 guiding principles, 131 ignores US financial problems, 149 injects liquidity into markets, Joint Supervisory Team, 192 and Maastricht Treaty, 128–9 and move to banking union, 191–4 non-adoption of leverage ratio, 189 policy rate, 144 raises rates, 133 vets European Stability Mechanism, 231 weakness, 105 European Coal and Steel Community, 111 European Commission Brussels location, 111 confederated structure, 234 created, 112 European Capital Adequacy Directive, 28 and European integration, 18–19 Monetary Committee, 170 plans for integrated banking system, 20–2 and proposed monetary union, 23, 115–17 rules on excessive debts, 233 Second Banking Directive, 19–20, 24, 27, 32 and Stability and Growth Pact, 151 vets European Stability Mechanism, 231 European Community Council of Ministers (ECOFIN), 117 European Council, 17, 115 European Currency Unit (ECU), 119, 124 see also Euro European Economic Community Common Agricultural Policy, 168 currency fluctuations, 117 277 customs union, 167 fixed exchange rates, 167 formed, 16–17, 112 and free movement of capital, 121–2 see also European Union European Financial Stabilisation Mechanism, 231 see also European Stability Mechanism European Financial Stability Facility, 231 see also European Stability Mechanism European Monetary Cooperation Fund, 117, 126 European Monetary Fund, 118, 168 European Monetary Union (EMU) and bank deposit insurance, 193 design, 153 and fall of interest rates, 36, 98, 102 future, 132, 248–9 and increasing economic integration, 237 initial members, 151 long-term expectation, 234 Maastricht Treaty initiates, 19 positive effects, 99, 248 principles and flaws, 229 reduces risk premiums, 98 trade and single currency, 238–40 European Reserve Fund, 125 European Stability Mechanism (ESM), 194, 231–3 European System of Central Banks (ESCB), 24, 126, 192 European Union alterations at times of distress, 234 and banking regulation, 10, 19–21, 23–5, 27–8, 187 commitment to closer (federated) union, 234 economy contracts, 151 and free movement of goods, services, labor and capital, 121 implements Basel 2, 83 integrated banking system, 32, 37 name adopted, 18, 112 single currency (Euro), 10, 19 on supervision of investment banking groups, 85 see also European Economic Community Evian, Switzerland, 122 Exchange Rate Mechanism (ERM) Balladur proposes reforms, 122 and Bretton Woods fixed exchange rate system, 147, 158, 162–3, 253 crisis (1992-3), 169–70, 172, 175, 177, 179 and Delors Committee, 124, 126 278 INDEX and German reunification, 169 introduced, 17, 118–20, 168–9 suffers from speculative attacks, 158 exchange rates determined by private markets, 147 Europe introduces, 117 and floating exchange rate system, 161 and international debt flows, 159–60 Fannie Mae (government-sponsored enterprise, US) capital buffers, 94–5 collapses, 95 dominates securitization market, 91 expansion, 68–9 formed, 48 issues mortgage-backed securities, 45, 50, 63 nationalized, 197, 204 profits squeezed, 49 upper loan limits, 76 Federal Deposit Insurance Corporation (FDIC, US), 55–6, 84–5, 187, 244–5 Federal Deposit Insurance Corporation Improvement Act (US, 1991), 52 Federal Home Loans Banks (US), 64 Federal Reserve Bank see United States Federal Reserve Bank financial crises causes and effects, 175–7 and regulation reform, 185 see also North Atlantic crisis financial markets see markets (nancial) Finanỗial Services Agency (UK), 83 Financial Stability Board (earlier Forum), 185 Financial Stability Oversight Council (FSOC, US), 196, 198 Finland escapes crisis, 15 expansion in assets, 86 trade boost, 239 fiscal policy, 147–8, 152–3, 209, 212, 215, 219 FleetBoston Financial Corporation (US bank), 69 Ford, Gerald, 165 Fortis (Belgium/Netherlands bank), 89, 186 France agricultural lobby, 121 aims for integrated Europe, 111–12 bank assets, 15 bank branches in other countries, 20–1 banking expansion, 33, 36, 38 banking system (2002), 42 banking system nationalized under President Mitterrand, 16, 120 close economic ties with Germany, 240 differences with Germany over monetary union, 109–10, 114–17, 122, 128–32, 230, 234, 248 and ERM crisis (1992), 170 in European Coal and Steel Community, 111 and European exchange rate system, 118–20, 170 favours political control of central bank, 113 and financial crisis, franc fort policy, 120 high inflation, 17, 115, 117, 120 interest rates, 251 internal risk models, 43 leaves and rejoins snake, 118 and investment banking, 86 outflows, 173 reduces fiscal deficit, 233 and single currency, 10, 19, 237 status in European Commission, 18 suspends sanctions for high fiscal deficits, 129 Freddie Mac (government-sponsored enterprise, US) capital buffers, 94–6 dominates securitization market, 91 expansion, 68–9 mortgage-backed securities, 49–50, 63 nationalized, 197, 204 profitability, 49 upper loan limits, 76 Friedman, Milton, 112 funding corporations, 65 G7 leaders’ summits, 149–51 Hokkaido Toyako (2008), 149–50 Venice (1987), 149 G20 group Chengdu (2016), 217 London (2009), 178, 185 Pittsburg (2009), 217 and fiscal stimulus, 210–12, 215 and Financial Stability Board, 185 and policy cooperation, 217, 218 and reform of banking system, 186 regular meetings, 150 Geithner, Timothy, 209 General Agreement on Tariffs and Trade (GATT), 150 General Motors: share value, 135 Genscher, Hans-Dietrich, 122, 127 Germany INDEX accepts monetary union, 127 aims for integrated Europe, 111–12 bank assets, 15 bank branches in other countries, 20–1 banking expansion, 33–5, 36, 38 banking system (2002), 42 controls inflation, 117 debts move to, 158 differences with France over monetary union, 109–10, 114, 116, 122, 128–32, 230, 234, 248 dominance in monetary union, 240 Dutch exports to, 148 empire founded (1871), 113 enforces rules, and European exchange rate system, 118–20 export-led economy, 242 favours independent central bank, 112 favours national bank supervision, 24 and financial crisis, foreign banks in, 21–2 interest rates, 98, 128, 251 internal risk models, 43, 79 Landesbanken, 72 and ERM crisis, 172 and investment banking, 86 reluctance to support periphery countries, 173 response to financial crisis, 231 reunification following fall of Berlin Wall, 110, 127–8, 130–1, 169 and single currency, 10, 19 small banks, 72 and snake, 168 status in European Commission, 18 strength of currency, 115 supply chain with eastern Europe, 239–40 suspends sanctions for high fiscal deficits, 129 tax reforms under Louvre Accord, 149 and value of currency, 163–4 warns of effect of Greek debt, 232 Giscard d’Estaing, Valérie, 114, 116, 118, 130, 163, 168 Glass–Steagall Act (US, 1933), 27, 45, 53–5, 57, 67, 73, 91, 198 Glicenstein, Gilles, 2–3 globalization, 148, 156, 159 gold and Long Depression, 219 standard, 114, 161–2 and US dollar, 147, 162–4 Gold Pool, 163–4 Goldman Sachs (US investment bank) 279 applies for bank holding company status, 93 assets, 933 becomes regulated bank, 186 competes as investment bank, 67 and competition with European banks, 94 lightly capitalized, 69 as LTCM creditor, 60 as shadow bank, 45 government borrowing, 147–8 government-sponsored enterprises (GSEs, US), 45, 48–50, 63, 68–9, 76, 197 Graham–Leach–Bliley Act (US, 1999), 54 Great Depression (1930s), 46, 147, 207–8, 244 great moderation, the, 134, 140–6 Greece accepts Basel capital rules, 127 adopts Euro, 237 fall in interest rate, 139 in currency union periphery, 241 economic recovery program, 229 in Euro area, 111 European aid to, 131, 231 excessive borrowing and debts, 7, 109, 130, 151, 170, 174, 232–4 expansion in assets, 86 financial crisis in, 5, 104, 229–30 fiscal mismanagement, 208 high interest rates, 251 joins Euro area, 99 loans from other countries, 180 product market improvements, 248 reduces fiscal deficit, 233 role of central government, Greenspan, Alan on bank supervision and regulation, 57–8, 136 on bank regulation, 136 favors reform of Basel 1, 78 and predictability of policies, 153 on risks posed by investment banks, 30 The Age of Turbulence, 30 Group of Ten, 25 GSEs, see government-sponsored enterprises Hawaii, 53 HBV (German bank), 89 hedge funds, 59–62, 196 helicopter money, 212 Hoechst (corporation), 16 homo economicus, 222, 224–6 Hong Kong: and Asian crisis, 157 house purchases and prices, 145–6, 211 see also United States of America 280 INDEX households: in economic theory, 143 houses: investment value, Housing and Urban Development Act (US, 1968), 48 HSBC (UK bank): in US, 94 Hugo, Victor, 114 human beings fads and crazes, 225–7 sociability, 224–5, 228 IFRB (accounting standards), 95 IKB Deutsche Industriebank AG (German bank), 3, 186 Illinois (US state): state banking regulations, 51 incomes: stagnation, Indonesia, 157, 171–2, 174 inflation rates, 117–18, 142, 146, 208, 212, 214–16, 219, 227 information technology and financial procedures, 141 and investment banks, 59 ING (Netherlands bank) accepts government capital injection, 186 expansion, 16, 35, 39–41, 42, 89 Institute for International Finance, 79 insurance: and mortgage-backed assets, 91 interest rates and borrowing costs, 251 capped in US, 45–7, 100, 198 and exchange rate, 147 and inflation, 209 reduced to zero, 210 International Monetary Fund (IMF) and perceived anti-China measures, 151 on benefits from open capital markets, 157 and European Stability Mechanism loans, 231 and exchange rate, 147 funds increased, 157 support in Asia crisis, 178–9 loans available, 162 as model for European Monetary Fund, 118 output gaps, resources fall behind increase in world trade, 150 on size of global economy, 150–1 international monetary system debt flows, 157–8 history of crises, 156–8 International Swaps and Derivatives Association, 79 Intesa Sanpaolo (Italian bank), 38, 42, 90 investment banking see also shadow banking benefit from nontraditional cash deposits, 65 funding, 61 and hedge funds, 60 and information technology, 59 regulation, 57–8 role and conduct, 58–62 Ireland accepts Basel capital rules, 127 bankers in, 8–9 banking expansion, 36–7, 42 borrowing excesses, 174 as ‘Celtic tiger’, 37 and currency fluctuations, 117 in currency union periphery, 241 in Euro area, 111 European aid to, 231 invited to join European Economic Community, 115 expansion in bank assets, 86 financial crisis in, 5, 208, 229 foreign investments in, 43 ‘light touch’ regulation, 32, 36, 42, 83–4, 136 reduces fiscal deficit, 233 successful effect of reforms, 216 Italy borrowing interest rate, 139 commercial loans, 36 connected firms in, in currency union periphery, 241 debt ratio, 130 in Exchange Rate Mechanism, 169 expansion in bank assets, 86 financial crisis in, 5, 208 high interest rates, 251 housing boom, 72 inflation rises, 17, 117 joins European Coal and Steel Community, 111 large outflows, 173 leaves Exchange Rate Mechanism, 158 low growth, 174 and monetary union, 115 product market improvements, 248 reduces fiscal deficit, 233 supports suspension of sanctions for high fiscal deficits, 129 ten-year bonds, 98 see also lira ITT (corporation), 16 INDEX Japan banking system, 96 in Basel Committee, 27 controls inflation, 117 debts outflow to, 158, 164 depression, 215 economic growth, 115 floating exchange rates, 167 and Louvre Accord, 149 Prime Minister Abe’s economic reforms (‘Abenomics’), 213, 215–16, 228 JP Morgan Chase (US bank), 46 acquires Bear Sterns, 186 assets, 93–4 banking model, 90 as national bank, 54, 66 Keynes, John Maynard, 146, 162 King, Mervyn, 23, 136, 209 Kohl, Helmut, 110, 121–2, 127, 130–2, 169 Kohn, Donald L., 144 labor markets: Euro area versus US, 246–7 Lamfalussy, Alexandre, 125 Larosière, Jacques de, 123–4 Latin America: debt crisis, 158, 164–7, 172–3, 175, 177, 180 Latin League (1865), 114, 249 Lawrence, T.E (‘Lawrence of Arabia’), Lehman Brothers (US investment bank) assets, 93 bankruptcy and collapse, 4, 7, 9, 45, 75, 85, 105, 133, 138, 150, 155, 185, 195, 229, 232 competes with other investment banks, 67 and European bank competition, 94 lightly capitalized, 69, 95 non-participation in rescue of LTCM, 60 as regulated bank, 195 rescue, 186 Leigh-Pemberton, Robert, 24, 123, 125–6 leverage, 145, 187, 189–91, 196, 198, 202 Lewis, Michael: The Big Short, 225 light touch regulation, 32, 36, 42, 83–4, 136 lira (Italian currency) Bundesbank ceases to support, 170, 179 ejected from ERM and rejoins, 128 see also Italy Lisbon accords (2000), 246 loan-to-value ratios, 181 London ‘big bang’ (October 1986), 35 as financial center, 35–6 London Interbank Offering Rate (LIBOR), 165–6 Long Depression (1870s), 219 281 Long-Term Capital Management (LTCM; hedge fund), 60, 70 Louvre Accord (1987), 149, 218 Lucas, Robert E., 142 Luxembourg in European Coal and Steel Community, 111 and monetary union, 115 Maastricht Treaty on Economic Union (1992), 10, 16, 19, 23–5, 32, 43, 110–11, 114, 127–32, 169, 192–3, 229, 234 macroeconomics and ‘Abenomics’, 216 and attitude to free markets, 214–15, 222–7 and business cycle fluctuations, 208 and DSGE models, 222 and effect of single currency, 240 and ‘homo economicus’, 222, 224–6 internal balance, 147 origin after Great Depression, 207 orthodoxy and policy challenges, 208–14, 227, 253 and policy cooperation/integration, 151, 219–22 and private sector, 227 and role of central banks, 213–14 unsettled environment, 198 and wariness of major structural reforms, 228 Maine (US state): and interstate banking, 53 Malaysia: Asia financial crisis 157, 171–2, 174, 180 Manufactures Hanover (US bank), 54 markets (financial) and competition, 147 differ from country to country, 137 and macroeconomic theory, 214–15, 222–7 unpredictability, 154 see also efficient market hypothesis Merrill Lynch (US investment bank) and European competition, 94 lightly capitalized, 69, 95 as LTCM creditor, 60 merges, 85 as regulated bank, 195 size, 67 Merriweather, John, 60 Merton, Robert, 60 Mexico: debts, 165–6 micro-prudential regulation and supervision, 137, 209 misery index, 175, 181 Mitterrand, Franỗois, 16, 18, 110, 1202, 124, 1278, 130, 16970 282 INDEX Models Task Force, 28 ‘Monetarists’ (Euro area): differ from ‘Economists’, 112, 115–16, 124, 130, 235, 249 monetary policy, 142–6, 151–3, 212, 215, 219–21 see also currency unions monetary union see European Monetary Union; single currency Monnet, Jean, 234 monopolies, 223 Morgan Grenfell (UK investment bank), 35, 38 Morgan, John Pierpont, 138 Morgan Stanley (US investment bank) applies for bank holding company status, 85 assets, 93 becomes regulated bank, 186 and European competition, 94 lightly capitalized, 69 as LTCM creditor, 60 as shadow bank, 45 size, 67 mortgages back assets and securities, 45, 50, 71, 76–7, 197 bundling, creditworthiness and securitization, 63–5, 69, 78, 91–2, 197 European investment in US, 73 market collapse, 77 residential, 64 sale of, 8, 55 subprime, 76–7, 88, 105, 133 in US, 3, 49–50, 52 Moynihan, Daniel, 146–7 Mullins, David, 60 Multilateral Development Banks (MDBs), 178 Mutual Assessment Process (MAP), 217 mutual funds, 45, 60 mutual recognition (European Union), 20–1 Napoleon I (Bonaparte), Emperor of France, 113–14 NationsBank (US bank), 54 Natixis (French bank), 38, 42 net asset value (NAV), Net Capital Rule (US), 56, 85 net stable funding ratio (NSFR), 189 Netherlands aims for European integration, 112 bank assets, 15 banking expansion, 33–5, 36, 38 banking system (2002), 42, 73 close economic ties with Germany, 240 and ERM crisis, 170 in European Coal and Steel Community, 111 exports to Germany, 148 and financial crisis, guilder revalued, 120 and investment banking, 86 and monetary union, 19, 115 trade boost, 239 New Deal (US, 1930s), 55 New England (US): house prices, 50, 244 New York city: as financial center, 36 New York (US state): interstate banking, 53 Nixon, Richard M., 146, 164 North Atlantic crisis and Basel rules, 96 causes, 173–4 and currency unions, 241 and debt flows, 180 and economic models, 152 effects and consequences, 175, 210–13, 250, 254 ends European banking boom, 18 European monetary union effect on, 132 and fall in confidence in experts, 253 financial boom and bust, 86, 97–105 misery index, 175 origins (August 2007), 1, 3–4, 8–9 output losses, 6–7, 156 responses to, 10, 185–6, 190, 205–7 responsibility for, and speculative ventures, 158 unpreparedness, 133–4, 155, 173 as watershed event, Norway invited to join European Economic Community, 115 in Scandinavian monetary union, 114 Obama, Barack, 212 Office of the Comptroller of the Currency (OCC; US), 54–5, 84, 165 oil prices, 165–6, 246 Organisation for Economic Cooperation and Development (OECD), 247 output losses, 4–7, 11 volatility, 140–1 Outright Monetary Transaction (OMT, Euro area), 191, 231, 233 Padoa-Schioppa, Tommaso, 123–4, 127 Parvest Dynamic ABS, petrodollars, 164–5, 173 Philippines, 172 INDEX physics: parallel with economic models, 154 Plaza Agreement (1985), 149, 161, 217 Pöhl, Karl Otto, 123–6, 129, 166 Pompidou, Georges, 116 Portugal borrowing interest rate, 138–9 commercial loans, 36 connected firms in, in currency union periphery, 241 in Euro area, 111 European aid to, 231 excessive borrowing, 174 in Exchange Rate Mechanism, 169 expansion in bank assets, 86 financial crisis in, 5, 208, 229 high interest rates, 251 product market improvements, 248 reduces fiscal deficit, 233 ten-year bonds, 98 pound sterling (UK currency) Bundesbank ceases to support, 170, 179 devalued, 163 diminishing role, 114 leaves ERM, 170 prisoners’ dilemma, 226 public sector borrowers, 165 quantitative easing, 210 quantum mechanics, parallels to economics, 143–5, 152–4 Quantitative Impact Studies (QISs), 81–2 Rajan, Raghuram, 155 random walk theory, 135 rational expectations, 223 Reagan, Ronald, 147, 149, 213–14, 254 Regulation Q see United States of America Reigal Neal Interstate Branching Efficiency Act (US, 1997), 53 renmimbi (Chinese currency): depreciation against dollar (1994), 172 repurchase agreements (repos) broker-dealers exploit, 65 collateral, 74–5, 197, 251, 255 expansion, 103 and foreign borrowing, 91–2 freeze, 105 fund housing bubble, 73–7 liquidity, 71 market shrinks in US, 197 as source of investment bank funding, 61 Ricardian equivalence, 148 Ricardian offset, 245 risk models, 28–33, 40–1, 43, 58, 78–83, 85–6, 136, 139, 187, 190, 196, 199, 245, 248, 255 283 risk-weighted assets, 196, 198, 201 Rochard, Michel, 120 Rome, Treaty of (1957), 16–18, 111–12, 116, 126, 167, 234 Roosevelt, Franklin D., 55 Roubini, Nouriel, 155 Royal Bank of Scotland (RBS; UK bank), 89 Russia exchange rate collapse (1998), 173 joins WTO, 150 safe haven bankruptcy protection (US), 74–5 Sanio, Jochen, Santander (Spanish bank) assets expanded, 201 capitalization, 42 international scope, 193 as mega-bank, 38 takeovers, 89 Sants, Hector, 83 Savings and Loans (US), 49, 51 Scandinavia: monetary union, 114 Schmidt, Helmut, 118–19, 130, 168 Schoales, Myron, 60 Securities and Exchange Commission (SEC; US) and mortgage-backed securities, 76 registers hedge funds, 196 and regulation, 9–10, 56, 61, 139 Release 47683 widens repurchase agreement collateral, 73 and repo market, 74–7, 91, 199, 251 securitization and mortgages, 45, 63–5, 78, 92, 251, 254 private label, 50–2 in US, 48, 50, 62, 68, 90–1, 197–8 Security Pacific Corporation (US bank), 54 shadow banks see United States of America share prices: fluctuations and predictions, 135–7, 139 Shiller, Robert, 137, 155, 225 Silva-Herzog, Jesus, 166 silver: in US money supply, 219 single currency benefits, 235 effect on trade, 238–40 and macroeconomic shocks, 240 see also Euro area Single European Act (1986), 12, 16, 18–21, 32, 121–2 Smith, Adam, 147, 223 Smithsonian Agreement, 117, 168 snake currency arrangement (Europe), 117–18, 168 284 INDEX Société Générale (French bank): expansion, 38, 41, 42 South Korea, 157, 171–2, 174, 178 Spain borrowing interest rate, 139 caja savings banks, 72 commercial loans, 36 in currency union periphery, 241 ejected from Exchange Rate Mechanism, 128 excessive borrowing, 174 in Exchange Rate Mechanism, 169 expansion in bank assets, 86 and ESM funding to restructure banking system, 194 financial crisis in, 5, 208, 229 high interest rates, 251 housing, 4, 72 included in Euro area, 111 local governments in, reduces fiscal deficit, 233 successful effect of reforms, 216 ten-year bonds, 98 Stability and Growth Pact (SGP, Euro area), 129–30, 151, 216, 231–4, 245 Strasbourg summit (of European leaders, 1990), 127, 132 Strauss-Kahn, Dominique, 210 stressed value-at-risk models (SVARs), 186 Suez (French bank), 16 supply and demand, law of, 222 Sweden in Basel Committee, 27 and currency fluctuations, 117 in Scandinavian monetary union, 114 Switzerland in financial crisis, trade with EMU members, 238 taxes cuts, 144, 209, 212–13, 228 favor debt over equity, 180 kept low, 227 little effect on private spending, 153 TCW (US bank), 38 Texas: house prices fall, 244 Thailand, 157–8, 171–2, 174, 178 Thatcher, Margaret, 121–3, 125, 127–8, 147, 213–14, 254 trade: affected by single currency, 238–40 trade balance, 148 Travelers Group (US financial institution), 54 Trichet, Jean-Claude, 209 Trump, Donald elected President, and fiscal stimulus, 217 looser view on bank regulation, 189 proposes tax cuts, 212 UBS (Swiss bank), 67 UniCredit (Italian bank), 38, 42, 89 United Kingdom (Britain) bank assets reduced since 2008, 200–1 banking expansion, 36–7, 42 banking system, 22 bond markets, 189 central bank independence, 211 common capital standard agreed with US, 26 core Euro banks expand into, 86 and currency fluctuations, 117 favors larger bank capital buffers, 43 favours EU-wide bank regulator, 24 financial crisis (1866), 138 foreign banks in, 22 foreign investments in, 43 high inflation, 17, 117 invited to join European Economic Community, 115 joins Exchange Rate Mechanism, 169 large outflows, 173 leaves European Union, leaves Exchange Rate Mechanism, 158, 170 ‘light touch’ regulation, 32, 36, 42, 83–4, 136 in North Atlantic financial crisis (2008), opts out of Maastricht Treaty, 128 owns US assets, 93, 102–3 product market, 248 rebate from EEC budget, 121 resists monetary union, 122, 128 scale of banking, 33 separated commercial and investment (merchant) banks, 19 trade with EMU members, 238 see also pound sterling United States of America accepts Basel framework for large banks, 189–90 accounting practices, 95 adopts new leverage ratio, 189 aggregate spending, 97–8 anchor regions and peripheries in currency union, 240–1 and Asian crisis, 172 assets held by European banks, 41, 102–3 bank assets reduced since 2008, 200–1 INDEX bank deposits migrate, 47 bank failures and prompt corrective action, 51–2 bank mergers, 54 bank size compared with Europe, 96 bankers’ morality, banking expansion, 95 banking regulation, 9, 19, 54–8, 62, 194–9, 243–4, 251–2 and Basel accord, 79–85 in Basel Committee, 27 bond markets, 189 bond yields fall, 102–3 business cycles, 248 champions internal risk models, 86 common capital standard agreed with UK, 26–7 consumer price index, 146 core Euro banks expand into, 86–8 as crisis country, currency as international standard, 114 currency union in, 235–7, 240–3, 246 debt outflows, 158–9 deregulation, 71, 86 devaluation, 149 effect of break-up of Bretton Woods on, 175 effect of post-crisis changes, 198, 203–5 Euro area lends to, 84, 173 European universal banks in, 70, 191 favors larger bank capital buffers, 43 federal support for banks, 244–5 federal tax system, 236 financial boom, 100–4, 156 financial reform in, 194–5, 250 financial system (2002), 68–70, 85 floating exchange rates, 167 Flow of Funds data, 90, 95 fractured banking system, 45–6 and gold market, 163 high tech boom collapses, 144–5 house prices, 3, 45, 50, 70–3, 76–7, 91, 93, 101–2, 105, 156, 191, 225, 244, 250, 252 imposes surcharge on foreign imports, 164 improved monetary policy, 141–2 inflation fluctuates, 45–7, 49, 117, 141–2, 146, 214 integrated banking system, 248 interest rates limited, 45–7, 100, 198 investment bank expansion, 67, 70 investment bank regulation, 195, 197, 205 labor market flexibility, 247 and Latin American debt crisis, 166–7, 172 285 misery index, 175 modest recovery from crisis, 208 national (interstate) banks, 53–4, 62, 66–7, 243 national price movements, 238 and oil prices, 246 output volatility, 140–2 policy coordination fades, 216 post 2002 financial boom, 199 product market, 247 recessions (1985–2005), 141 regulation of shadow banks, 194–9 and repo market, 74–5 response to crisis, 207 responsibility for macroprudential policies, 211 and risk measures, 41, 58 securitization, 68, 90–1 separates commercial and investment banking, 27, 32, 57 shadow banks develop, 44–5, 47–8, 52, 54–5, 62–3, 68, 71, 91, 95, 251 and small bank regulation, 206 trade balance, 103, 148 trade with EMU members, 238 unprepared for financial crisis, 133 United States Federal Reserve Bank belief in market discipline of investment banks, 70, 79, 83–4, 86, 250 and business cycle, 141–2 conducts stress tests, 192 cooperation of monetary and fiscal policy, 219 eases rates, 4, 133 easy financing conditions, 252 emergency funding, 44, 186 faith in investors’ judgment, 136 helps stabilize markets, 138 and house price boom, 144–5 and inflation rates, 141–2 monetary policy, 144 as proposed model for European Central Bank, 123 provides safety net, 7, 195 regulates mortgage lending standards, 77 and regulation of investment banks, 57–8, 197 Regulation Q, 46 regulatory function and practice, 10, 30, 53, 55–7 response to crisis, 105 and risk models, 31–2, 58, 139 and tax cuts, 213 urges reform of Basel 1, 78 warns about loans to Latin America, 180 286 value-at-risk models (VARs), 186 Venezuela, 166 Versailles Treaty (1919), Vietnam War, 114 Volcker, Paul, 141–2, 166 rule, 196 Wachovia Corporation (US bank), 69 Wall Street: reform, 195 waterfall investment structures, 61–2 welfare payments, 153 Wells Fargo (US bank), 45, 69 Werner Commission Report (Europe) (1970), 113–17, 124–5, 248 INDEX West Germany economic growth, 115 in European Coal and Steel Community, 111 see also Germany White, Bill, 155 White, Harry Dexter, 162 won (S Korean currency), 172 World Bank: and international debt flows, 178 World Trade Organization (WTO), 150, 238 yen (Japanese currency): depreciation (1990s), 172 .. .UNFINISHED BUSINESS i ii UNFINISHED BUSINESS The Unexplored Causes of the Financial Crisis and the Lessons Yet to be Learned TAMIM BAYOUMI YALE UNIVERSIT Y PRESS NEW HAVEN AND LONDON... in the US and Euro area and associated knockon to their exports.4 This suggests three levels of analysis: The costs accruing to the crisis countries themselves, those applying to the rest of the. .. examining the origins of the joint North Atlantic crisis Rather than using the prism of the immediate crisis to distill lessons, it asks what can be learned from the process by which the North