Breaking the Bank: Understanding the Current Banking Crises

Jul 23, 2008Jul 24, 2008


Session One: Wednesday, July 23rd
GSEs in Crises: The Reasons and the Reforms
Lawrence J. White
Professor of Economics
New York University 

Session Two: Thursday, July 24th
Lessons Learned: A History of American Bank Failures
Joseph Mason
Associate Professor
Louisiana State University 

With Wall Street’s woes making daily headlines, people lining up around the block to withdraw savings, and once mighty financial institutions begging for assistance, it is fairly safe to say that the financial services industry is going through its toughest period since the Savings and Loan crises of the 1990’s.  As Congress begins to ask questions and propose solutions, the Mercatus Center would like to help policymakers better understand the current situation with a two-day course designed to explore some of the underlying issues.

The U.S. housing market was the engine of domestic economic growth over the past decade.  During this time, the "Big Three" Government-Sponsored Enterprises (GSEs) - Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System - became giants in the mortgage industry.  This massive growth, along with several accounting scandals and the current subprime situation, has caused concerns among policy makers regarding the oversight of these enormous organizations.  How did the current problems come about, and why wasn’t anything done earlier to prevent them?

Financial downturns resembling the current crises have occurred periodically in the United States during the late nineteenth and early twentieth centuries.  Bank failures have a long history in the United States, the most notable occurring during the period of the Great Depression.  Equity and real estate prices began to fall in the summer of 1929, and banking panics followed beginning in the fall of 1930 until the winter of 1933, when recovery began.  What drives powerful financial institutions to fail, and what measures have policymakers put in place to prevent Great Depression like disasters from happening in the future?

To explore these issues, the Mercatus Center’s two-day program will address questions such as:

  • How do previous bank emergencies compare to the current situation? What lessons and insights can we gain from past experience?
  • Should the government bail out either the lenders or the homeowners who cannot make their housing payments?
  • What benefits have the GSE’s congressional charters provided to U.S. housing markets?
  • What would proposed reforms mean for GSEs and the housing market as a whole?