The Federal Reserve's Financial Crisis Response B: Lending & Credit Programs for Primary Dealers

AbstractWe examine the politics of financial crisis response in Japan and the United States. Many existing accounts of Japan's ‘lost decade’ of the 1990s have emphasized Japan-specific factors, such as structural problems, policy errors, and political dysfunction. We argue that Japan may have been subject to a form offirst-mover disadvantage. Like innovation in the private sector, developing effective solutions to novel policy problems requires a messy process of discovery, experimentation, and repeated failure. Much as late-industrializing countries adapted the methods and technologies of early developers, second-movers can apply effective policies demonstrated by first-movers in a more targeted, efficient, and rapid manner. We show that the behavior of Japan and the United States during their respective financial crises is broadly consistent with this theory. In addition, policy adoption in the United States most clearly reflected lessons from Japan in areas where the lessons were considered clear and implementation was less politicized.

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Financial Crises

10.1093/acrefore/9780190846626.013.180 ◽

2017 ◽

Author(s):

Candace Archer

Keyword(s):

World War Ii ◽

Financial Crisis ◽

Business Cycle ◽

Intellectual History ◽

Rational Expectations ◽

Karl Marx ◽

International Political Economy ◽

Adam Smith ◽

Crisis Response ◽

John Maynard Keynes

Numerous crises have occurred since the beginnings of the modern economic system, from the Dutch Tulip Mania of 1636 and the South Sea Bubble of 1720 to the Dollar Crisis and Asian Financial Crisis. Scholars have written about the causes and remedies of financial crisis, resulting in a substantial amount of literature on the subject especially after the Great Depression. The writing on financial crisis declined between the end of World War II and the monetary crises in the early 1970s, but has become vibrant again since the 1980s. Some of the earliest voices that contributed to the intellectual history of studying financial crisis include Adam Smith, Karl Marx, David Ricardo, Walter Bagehot, and John Maynard Keynes. These men provided the foundation for understanding the central issues and questions about financial crisis and influenced the debates and scholarship that followed. One such debate involved monetarists vs. business cycle theorists. The monetarists argue that crises are caused by changes in the money supply, while those favoring a business cycle approach insist that expansions and contractions are part of economic interactions and so the economy will at times experience crises. As crises continue to affect both domestic and global financial markets, more perspectives are added to the discussion, including those that invoke rational expectations and economic models, along with those that draw from international political economy. There are also questions that remain unanswered, such as the issue of crisis response and that of financial fragility.

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