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BubblesandCentralBanks:

HistoricalPerspectives1

MarkusK.Brunnermeier
PrincetonUniversity,NBER,CEPR,CESifo

IsabelSchnabel
JohannesGutenbergUniversityMainz,MPIBonn,CEPR,CESifo

January21,2015

Abstract:Thispaperreviewssomeofthemostprominentassetpricebubblesfromthepast
400yearsanddocumentshowcentralbanks(orotherinstitutions)reactedtothosebubbles.
The historical evidence suggests that the emergence of bubbles is often preceded or
accompanied by an expansionary monetary policy, lending booms, capital inflows, and
financial innovation or deregulation. We find that the severity of the economic crisis
followingtheburstingofabubbleislesslinkedtothetypeofassetthantothefinancingof
thebubblecrisesaremostseverewhenaccompaniedbyalendingboomandhighleverage
ofmarketplayers,andwhenfinancialinstitutionsthemselvesareparticipatinginthebuying
frenzy. Past experience also suggests that a purely passive cleaning up the mess stance
toward the buildup of bubbles is, in many cases, costly. Monetary policy and
macroprudential measures that lean against inflating bubbles can and sometimes have
helped deflate bubbles and mitigate the associated economic crises. However, the correct
implementationofsuchproactivepolicyapproachesremainsfraughtwithdifficulties.

WethankStephanieTitzck,ChristianWolf,andespeciallySarahHellerandSimonRotherforexcellent
researchassistance.Wearealsogratefulforcommentsreceivedfromparticipantsinthetwoconferenceson
theprojectOftheUsesofCentralBanks:LessonsfromHistoryinGenevaandOslo,andespeciallyfromour
discussant,AndrewFilardo.

I. Introduction
There is a longstanding debate regarding the role that monetary policy should play in
preventing asset price bubbles. In the years before the recent financial crisis, the Federal
Reserve and most other central banks were reluctant to use monetary policy as an
instrumentfortacklingassetpricebubbles.However,inlightofthehugecostsofthecrisis,
manyobserversspeculatewhetherthesecostscouldhavebeenavoidedoratleastreduced
ifcentralbankshadtakenintoaccounttheevolutionofassetpricesintheirmonetarypolicy.
The debate gathered momentum in the aftermath of the crisis as it was feared that
historically low interest rates and nonconventional monetary measures would give rise to
newassetpricebubblesandtherebyplanttheseedsforanewcrisis.
Thereexistanumberofdifferentviewsconcerningtheroleofmonetarypolicywithregard
toassetpricebubbles.BernankeandGertler(1999,2001)arguethatassetpricesshouldplay
aroleinmonetarypolicyonlyinsofarastheyaffectinflationexpectations.Inthisregard,the
componentsofpriceindicesusedbypolicymakersplayadecisiverole.Typically,assetprices
are not explicitly included in these price indices. However, real estate prices are indirectly
taken into account through rents. Consequently, Goodhart (2001) argues that the whole
debatecouldbesolvedifassetpricesweregivenalargerweightintheinflationtarget.In
contrast, others take the view that asset price developments should not be targeted by
monetary policy at all. For example, the Feds declared policy prior to the subprime crisis
was to clean up the mess, i.e., to mitigate the consequences of bursting bubbles rather
thantrytodetectandpreventassetpricebubbles(Greenspan,1999,2002).
Several arguments have been brought forward to support the belief that monetary policy
shouldnotreacttoassetpricebubbles.First,bubblescannotbeidentifiedwithconfidence.
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A deviation from the fundamental value of an asset could be detected only if the assets
fundamentalvaluewasknown.Second,monetarypolicyinstrumentsaresaidtobetooblunt
tocontainabubbleinaspecificmarket.Inparticular,whilehikesofthepolicyrateiflarge
enoughmayinfactdeflateabubble,thiscomesatthecostofsubstantialdropsinoutput
andinflation(AssenmacherWescheandGerlach,2008).Thesecostsmaywelloutweighthe
benefits of bursting the bubble. Third, bubbles appear to be a problem especially in
combination with unstable financial institutions or markets. Therefore, bubbles should be
tackled by financial regulation rather than monetary policy. Overall, these arguments
resonate closely with the divine coincidence of standard New Keynesian models
(Blanchard and Gal, 2007): If inflation is stable, then output will be at its natural level, so
thereisnoneedtogiveanyextraattentiontoassetpricesandpotentialbubbles.
This view has been forcefully opposed by the Bank for International Settlements (BIS).
Several prominent BIS economists have argued that monetary policy should lean against
the wind, i.e., try to prevent the buildup of bubbles by reacting early on to upward
trendingassetprices (Cecchettietal.,2000;BorioandLowe,2002;White,2006).Although
they recognize the difficulties associated with the identification of bubbles, proponents of
thispolicyapproacharguethatapassiveroleisnotoptimal.Asinotherdecisionproblems
underuncertainty,policymakersshouldrelyonaprobabilisticapproach.Tounderpinthese
arguments,somepointtothefactthatmanyobserversdetectedtherecenthousingbubble
intheUnitedStateswellbeforeitburst.
Moreover, the expected costs of bursting bubbles are said to outweigh the costs of early
intervention. Such costs include, for example, the risk of new bubbles after a cleaning
approach has been taken. The reason is that such a policy is asymmetric, which tends to
raisethepricelevelandriskscreatingthenextbubble(thefamousGreenspanput).
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Finally, proponents suggest that financial regulation as a means to avoid or counter asset
pricebubblesmaynotbefullyeffectiveinallcircumstances.Thisregardsthetimingaswell
asthescopeofinterventions.Withrespecttotiming,financialregulationmayprovetobe
procyclicalratherthancountercyclical.Concerningthescope,regulationmaybeundermined
byregulatoryarbitrage.Monetarypolicycouldbeamoreeffectivetoolsinceitalsoreaches
theshadowbankingsystem.Indeed,thecentralbankmaynotevenneedtodirectlyadjust
monetarypolicy;instead,itcoulduseverbalcommunicationtodampenbubblesineffect,
talkdownthemarket.
Intherunuptotherecentfinancialcrisis,theFedandothercentralbankslargelyfollowed
the Greenspan view of a monetary policy that did not try to prevent the emergence of
bubbles.Instead,theycleanedupthemesswhenthecrisisbroke,justastheyhaddone
after the dotcom bubble burst in 2000. In fact, they had considered the expost cleanup
operation quite successful. Of course, they ignored the fact that the dotcom bubble had
beenlargelyfinancedbyequityandnotbydebtasthesubprimebubblehadbeen.However,
the recent crisis has shown quite plainly the huge costs that can arise from bursting asset
price bubbles. The theoretical links between (bursting) bubbles, financial crises, and the
associated macroeconomic fallout are discussed in detail in Brunnermeier and Oehmke
(2013). Overall, the recent crisis experience tilted the view toward more intervention, and
theoldconsensus(Greenspanview)hasseeminglyshiftedtoanewconsensusclosertothe
BISview(see,forexample,thespeechesbyJeremyStein,formermemberoftheBoardof
GovernorsoftheFederalReserveSystem,February7,2013andMarch21,2014).Thenew
debatethereforecentersmoreonthequestionofhowtoreacttoassetpricebubbles.Most
people agree that the newly created macroprudential instruments can serve this purpose.

Thequestion,however,iswhetherthisissufficientorwhethermonetaryauthoritiesshould
explicitlyconsiderassetpricedistortionsintheirdecisions.
Thispaperattemptstoshednewlightonthisdebatebytakingahistoricalperspective.We
documentthemostprominentassetpricebubblesfromthepast400years,characterizing
the types of assets involved, the holders of assets, policy environments during the
emergenceofbubbles,theseverityofcrises,andpolicyresponses.Bytheverynatureofour
approach, we cannot present any definitive policy conclusions. Rather, we try to identify
typicalcharacteristicsofbubblesandillustratetheinescapabletradeoffsattheheartofthe
leaning versus cleaning debate. In particular, we link the severity of crises to certain
featuresofbubblesandtothesubsequentpolicyresponse.
Ouroverviewofbubblesisinevitablyselective.Wetypicallylearnaboutbubblesthateither
were not tackled and burst or that were tackled by mistake, resulting in severe crises. In
ordertodealwiththisselectionproblem,wealsosearchedforbubblesthatdidnotresultin
severe crises because these are most likely to be instructive regarding effective exante
policymeasures.Althoughwecannothopetoremovetheselectionproblemfromhistorical
reporting,thismayhelpmitigateit.
ThepaperwillproceedinSectionIIbydescribingourselectionofcrisesandbyprovidingan
overview of the 23 identified bubble episodes, including the types of assets andeconomic
environments.SectionIIItriestolinktheseverityofcrisestothedescribedcharacteristicsof
bubble episodes. Section IV then develops a number of hypotheses regarding the
effectivenessofvariouspolicyresponses.Thesehypothesesarethendiscussedinformallyby
providingillustrativesupportingorcontradictingevidencefromindividualbubbleepisodes.

SectionVconcludesbysummarizingourresultsandderivingsomepolicyimplications.The
appendixcontainsadetailedoverviewofthe23crisesonwhichouranalysisisbased.

II. AnOverviewofBubbleEpisodes
II.1Selectionofbubbleepisodes
Our analysis focuses on 23 famous bubble episodes from economic history. In order to
identify these episodes, we started from the full sample of crises in the seminal book by
Kindleberger and Aliber (2011), Panics, Manias, and Crashes: A History of Financial Crises.
We reduced the sample by only considering episodes that were related to an asset price
boom.Hence,anoverheatedeconomywouldnotbedescribedasabubbleifnoparticular
bubble asset was involved. For example, the Panic of 1819, which is sometimes called
Americasfirstgreateconomiccrisis,canbetracedtoanoverheatedeconomythatincluded
overtradingand speculation in nearly all kinds of assets. Other crises, such as thePanic of
1907,evolvedmainlybecauseofotherfactors,suchasanunsoundbankingsector.Wealso
hadtokeepthesizeofoursamplemanageableandthereforeexcludedepisodesthatwere
very similar to included episodes but for which less material was available. In other cases,
bubble episodes seemed closely related to previous crises or did not provide additional
insights. Moreover, some episodes had to be removed because too little secondary
literaturecouldbefoundonthem.Wedidnotdropepisodesmerelybecausethecriseswere
not severe enough. Rather, such crises may be the most interesting for us because they
could point toward effective policies for dealing with a crisis. Nevertheless, the listing in
KindlebergerandAliberalreadyhasaselectionbiasinthedirectionofseverecrises,which
wecouldnotavoid.Thislimitationshouldbekeptinmindwheninterpretingoursampleof
crises. Wecomplemented the sample by adding some important bubble episodes that are
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not covered in Kindleberger and Alibers book: namely, the Chicago real estate boom of
188183, the Norwegian crisis of 1899, and the Australian realestate bubble in the early
2000s.
Table1:Overviewofsampleofbubbleepisodes

Ourselectionleadstoasampleof23bubbleepisodes,listedinTable1andspanningalmost
400 years. The table in the appendix contains a detailed overview of all bubble episodes
considered.ThefirstbubbleistheTulipmaniaof163437,andthemostrecentonesarethe
U.S. subprime housing bubble and the Spanish housing bubble. The table in the appendix
startsbygivingabriefoverviewoftherespectivebubblesandtheirwidercontext.Thenit
liststhemajorcharacteristicsofthesebubbles,suchasthetypeofassets,theirholdersand
their financiers, and the displacement that presumably triggered the bubble. The table
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then describes the economic environment accompanying the origins of the bubbles. We
specifically consider expansive monetary policy, the occurrence of lending booms, foreign
capitalinflows,andfinancialderegulation.Thesefourfactorsaretypicallysaidtoaccelerate
theemergenceofbubbles.Thetablealsocollectsindicatorsregardingtheseverityofcrises,
focusingonthreeaspects:theseverityoftherecession,theoccurrenceofabankingcrisis,
andspilloverstoothercountries.Mostimportantly,thetabledisplaysvarioustypesofpolicy
reactions.Thefinallineofthetableliststhesources.
Onewordofcautionaboutnomenclatureisnecessaryhere.Weareusingthewordbubble
in a rather broad (and somewhat sloppy) sense here. Our data are not sufficiently rich to
have any chance of truly identifying deviations of prices from fundamental values.
Therefore,thewordbubbleheremerelyreferstothefactthattheassetpricemovement
was considered excessiverightly or wronglyby market participants and that the result
wasoften(butnotalways)asharppricedecreasewhenthebubbleburst.
II.2Characteristicsofbubbles
The list shows that bubbles historically occurred in many different asset classes, ranging
fromcommodities(suchastulips, sugar,orgrain)tofinancialassets(especiallystocksand
bonds), real estate (land as well as residential and commercial building sites), and
infrastructureprojects.Bubblesincommoditieswerepresentespeciallyintheearlierpartof
the time span examined in our sample. The 19th century saw many bubbles in the area of
infrastructure,suchasrailroadsandcanals.Incontrast,bubblesinsecuritiesandrealestate
emergedthroughoutoursampleperiod.
Withrespecttotheholdersofbubbleassets,weareparticularlyinterestedinwhetherthe
assets were held by specific groups of society or by large parts of the population. When
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assetsareheldbyspecificgroups,suchasspecializedtradersorwealthyindividuals,wealth
effectsonconsumptionandinvestmentarelikelytobesmallerthanwhenassetsareheld
widelyandconstitutealargeshareofagentswealth.Wealsoanalyzewhetherassetswere
held directly by financial institutions, which could amplify a crisis owing to fire sales or
margincalls.Regardingthefinancingofbubbleassets,acrucialaspectistheimportanceof
debtfinancingbecausethisraisestheprobabilityofspilloverstootherpartsoftheeconomy.
Virtuallyallbubblesinoursamplewerefinancedbydebttoalargedegree.Twonoteworthy
exceptions are the Chicago flat craze and the dotcom crisis, which were to a large extent
financedbyequity,aswillbediscussedinmoredetailbelow.Inaddition,weareinterested
inwhetherbankswereinvolvedinthefinancingofthebubbleassetsbecausethisincreases
thelikelihoodofabankingcrisis.
Bubbles are typically triggered by some type of displacement, an exogenous shock that
significantly changes expectations and fuels a bubble (see Kindleberger and Aliber, 2011).
Examples are technological innovations (such as railways or the emergence of the New
Economy), financial innovations (e.g., futures, acceptance loans, or securitization) or
deregulation(openingnewbusinessopportunities),andpoliticalevents(likethebeginning
or end of a war). This displacement frequently happens in specific sectors and channels
fundsintospecificuses.Itisoftenaccompaniedbyeuphoriaandextrapolativeexpectations,
makingpeoplebelievethattheupwardmovementofpriceswillcontinueforever.
II.3Economicenvironment
Thesecondsectionoftheappendixtablecharacterizestheeconomicenvironmentinwhich
thebubblesemerged.Theoverallpictureisfamiliarandconfirmsstandardresultsfromthe
literature.Weseethatmostoftheidentifiedcrisesemergedwhenthestanceofmonetary
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policy was expansive. For earlier periods, when central banks either did not exist or were
more similar to private banks, the issuance of bank notes by private banks often had an
expansionaryeffectonmoneysupplyintheearlyphaseofabubbleepisode.Anexampleis
theLatinAmericanManiainEnglandin182425,whencountrybanksissuedlargevolumes
ofsmalldenominationbanknotes(Neal,1998,p.55).AnotherexampleistheGrnderkrise,
whensomefederalstatesinGermanybroadenedtherightsofmoneyemissionforcertain
banks. In other cases, such as the crisis of 1857 or the panic in Australia in 1893, gold
discoveriescausedanexpansionofthemoneysupplyandspurredoptimisticexpectations.
Although we cannot make any causal statements here, our observations are in line with
evidencebyBordoandLandonLane(2013),whoshowthatloosemonetarypolicyhasa
positiveimpactonassetprices,especiallyinperiodsofassetpricebooms.
Similarly, the overwhelming share of bubbles was accompanied by a lending boom, which
appears to be an almost universal feature of asset price bubbles. This expansion of credit
was frequently related to financial innovation. For example, before the crisis of 1882,
forward securities trading at the Paris and the Lyon exchanges were financed through a
systemofreports:Topurchaseasecurity,theinvestorcouldmakeadownpaymentand
borrow the rest from a stockbroker (agent de change). The broker himself borrowed
moneyinthecallmarketfrombanks,caisses,andindividualsforonedayandexpectedto
roll over the loan each day, a structure that proved to be vulnerable in a crisis. Other
examplesoffinancialinnovationsentailingtherapidexpansionofcreditareswiveling(the
useoffictitiousbillsofexchangetocreatecredit)beforethecrisisof1772,theinventionof
theacceptanceloanbeforethecrisisof1763,orthesecuritizationofmortgagesintherun
uptotheU.S.subprimecrisis.Reversely,notalllendingboomsleadtoassetpricebubbles,
as they may also lead to a more general overheating of the economy rather than to
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exaggerations in a particular asset market. Hence, lending booms appear to be (almost) a


necessary,butnotsufficient,conditionfortheoccurrenceofassetpricebubbles.
Insomecases,bubblesseemtohavebeenfueledbycapitalinflowsfromabroad.Inmore
thanhalfofthebubbleepisodes,notonlydomesticbutalsoforeigninvestorsparticipatedin
thebuyingfrenzy.Examplesarefoundthroughouttheperiodconsideredinthisstudy.The
RailwayManiainEnglandduringthe1840swasfueledbymassiveforeigninvestmentsinthe
railwaysystem.Similarly,priortothePanicof1857,theUnitedStatesreceivedlargecapital
inflows,mainlyfromEnglandbutalsofromGermanyandFrance.Nearlyhalfofabout$400
million in outstanding railroad bonds in the mid1850s was financed by foreign investors;
followingnetinvestmentoutflowsof$3millionin1849,netinflowsgrewto$250millionin
the crisis year 1857 (Riddiough and Thompson, 2012, p. 4, and sources therein). Foreign
capitalalsoplayedaconsiderableroleduringthePanicof1893andtheGermanstockprice
bubble of 1927. Often, the bursting of bubbles leads to a redirection of capital flows,
spurringnewassetpriceboomsinotherregions.ExamplesaretheScandinavianandAsian
assetpricebubblesaftertheburstingoftheJapanesebubble,aswellasthedotcombubble
andtheU.S.subprimehousingbubbleaftertheAsiancrisis.
Finally, bubbles often occur during phases of financial deregulation. Examples are the
Grnderkrise of 187273, when the reform of stock corporation law led to a surge in the
foundation of jointstock companies, as well as most of the recent crises in our sample.
Differences in the extent and speed of deregulation of financial markets and banks are
pointed out as a major cause of the lending boom and the associated difficulties in the
Japanese asset price bubble (see, e.g., Hoshi and Kashyap, 2000; Posen, 2003). Finance
becamelessdependentonbanksduetothederegulationofbondandstockmarkets(e.g.,
theopeningofforeignbondmarketsandlessstringentcollateralrequirements).Remaining
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relativelystrictlyregulated,bankslosttheirbestclientsandwerenotabletoenterintonew
fields of business. Therefore, they responded with a rapid expansion of lending to small
firms, to foreign borrowers, and especially to the real estate sector. By 1990, real estate
loansinJapanhaddoubledfromthebeginningofthe1980s.

III. SeverityofCrises
Allbubbleepisodesinoursamplearecharacterizedbystrongincreasesinassetprices,but
notallofthemendedindeepdepressions.Inthissection,weaskhowtheseverityofcrises
wasrelatedtothecharacteristicsofbubblesandtheireconomicenvironments.Theroleof
policyresponsesisdiscussedinthenextsection.
In our sample, no clear relationship exists between the types of bubble assets and the
severity of crises. Bubbles involving real estateoften lead to a severe recession. However,
thesameistrueformanybubblesnotinvolvingrealestate.Forexample,thebubbleingrain
andsugarin1763,theLatinAmericaManiaandtheRailwayMania(bothinvolvingsecurities
and commodities), and the French crisis of 1882 (involving securities) all had severe real
consequences.Thisisimportantbecauseitsuggeststhatanoverlynarrowfocusonbubbles
inrealestatemarketswhichappearstohavehappenedfollowingtherecentcrisisdueto
theprominenceofrealestatebubblesatthattimeismisplaced.Aprominentexampleofa
realestatebubblenotleadingtoadeepdepressionistherealestatebubbleintheUnited
States during 192026 (see Alston et al., 1994; White, 2009). This period saw a boom and
bust in housing prices similar to that during the recent financial crisis. Nevertheless, the
immediateeffectsonboththebankingsystemandtherealeconomywererathermodest.2

PostelVinay (2014) has a less benign view of real estate lending in that period. She argues that it was an
important determinant of subsequent bank failures during the Great Depression, but due not to low loan
qualitybuttoitseffectonbanksliquidity.

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Aninterestingquestioniswhetherthiscanbeexplainedbyspecificpolicyresponses,aswill
bediscussedbelow.
Generally,thefinancingofassetbubblesseemstobemorerelevantthanthetypeofbubble
asset. Since real estate is typically debtfinanced, such bubbles tend to be severe. But the
samecanbetrueforotherassetbubblesifdebtfinancingispervasive.Infact,theseverityof
acrisisisclearlyrelatedtothepresenceofalendingboom.Compare,forexample,thetwo
earlycommoditybubblesinoursample,theTulipmaniaandthecrisisof1763.Theformer
wasnotaccompaniedbyalendingboomgiventhatthepurchaseoftulipswaspartlyequity
financedandtheextension ofloanswaslimitedtoarathersmallshareofthepopulation.
Moreover,loansweregranteddirectlybythesellersofthebulbswithouttheinvolvementof
financial intermediaries. When the bubble collapsed, market participants experienced
painfullosses,butthesedidnotspreadtotherestoftheeconomy.
The situation in 1763 was very different. Through chains of bills of exchange, credit
expanded greatly, especially among financial institutions. When asset prices collapsed,
highlyleveragedfinancialinstitutionsfailed,leadingtofiresalesandalargescalefinancial
crisis with severe repercussions for the real economy (Schnabel and Shin, 2004). Another
comparisoncanbemadebetweentheRailwayManiainEnglandduringthe1840sandthe
dotcom crisis. In both instances, the displacements were technological innovations
railwaysandtheInternet,respectively.Widepartsofthepopulationwerecapturedbythe
euphoriasurroundingthenewtechnologies.Butonlytheformercrisiswasaccompaniedby
alendingboom,whereasthepurchaseofstocksinthedotcomcrisiswas,toalargerextent,
financedbyequity.Consequently,theRailwayManiawasaccompaniedbyaseverebanking
crisis followed by a serious recession, whereas the dotcom crisis ended in a rather mild
recessionanddidnotinvolveanymajorbankfailure.Lendingboomsinthebankingsector,
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especiallywhenaccompaniedbydecreasinglendingstandardsasinAustraliain1893orin
Japan during the 1980s, are dangerous especially because they make the occurrence of
bankingcrisesmorelikely.Andbankingcrisesareamajordeterminantoftheseverityofa
crisis.Indeed,almostallcrisesinoursamplethatwereaccompaniedbyabankingcrisisled
to a severe recession. In contrast, none of the crises without a banking crisis ended in a
severerecession.
The mildest crises were those where the leverage of market participants was limited. One
example of this phenomenon is the Chicago real estate boom of 188183, which was
characterized by rather low leverage of market participants and did not end in a severe
recession.
In several episodes, financial institutions were directly affected by the bursting bubbles
becausetheythemselveswereparticipatinginthespeculationandwerethereforeholding
theassetsinquestionontheirbalancesheets.Importantexamplesarethecrisisof1763in
NorthernEuropeandthePanicof1893inAustralia.Inbothinstances,thebankingcrisiswas
accompaniedbyfiresales,whichacceleratedtheassetpricedeclineevenfurther.Inother
cases, such as the German stock price bubble of 1927, one can argue that the decline in
assetprices(inthiscase,stocks)weakenedbanksbalancesheetsandlaidthegroundwork
fortheensuingdeepcrisis.

IV. Policyresponses
The existing literature presents little empirical evidence of the role that policy can play in
dealingwithassetpricebubbles.Our23bubbleepisodesofferabroadspectrumofpolicy
responsesindifferentphasesofassetpricebubblecycles.Webroadlydistinguishbetween

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four types of policies: cleaning up the mess, leaning interest rate policy, macroprudential
measures,andcentralbankcommunication(ortalkingdownthemarket).
The category (only) cleaning contains those bubbles where no significant policy reaction
wasobservedbeforethebubbleburst.Meanwhile,apolicyreactioniscalledleaningifit
has the potential to dampen the bubble in the runup phase. It is difficult to distinguish
betweendeliberateandunintentionalleaning,andwedonotattempttodoso.Forderiving
policy implications, it is relevant whether these policy responses had an effect or not,
regardless of the initial intentions. Extreme forms of leaning are policy actions resulting in
the bursting of bubbles, sometimes called pricking in the literature. Pricking can be
understood as a leaning policy that comes too late or is too strong, bursting the bubble
ratherthandeflatingitslowly.
Leaningcaninvolveinterestrateincreases(calledleaninginterestratepolicyinthispaper)
orothertypesofmeasuresthatwouldnowadaysbecalledmacroprudentialorquantity
instruments. These include limits on the loantovalue ratios for banks and explicit credit
restrictions. Note that leaning is sometimes used in a narrower sense, including only
interest rate changes.3 In our analysis, macroprudential instruments are also considered
leaninginstruments.
Finally,centralbankscouldalsoleanbytalkingdownovervaluedassets.Giventhatprivate
agentsbroadlyhaveaccesstothesameinformationascentralbanks,itisnotaprioriclear
whethermerestatementswithoutanyimpliednewsaboutfutureinterestratemovements
ormacroprudentialpolicyresponsescaninfactshiftassetprices.AbreuandBrunnermeier

Suchadefinitionwas,forexample,usedbyJeanClaudeTrichet,formerpresidentoftheEuropeanCentral
Bank,whoinaJune8,2005speechdescribedleaningasfollows:Theleaningagainstthewindprinciple
describesatendencytocautiouslyraiseinterestratesevenbeyondthelevelnecessarytomaintainprice
stabilityovertheshorttomediumtermwhenapotentiallydetrimentalassetpriceboomisidentified.

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(2003) offer one potential explanation for the suggested link between purely verbal
communication and actual asset prices: Rational investors (bubble arbitrageurs) may
understandthatthebubblemarketwilleventuallycollapse,butchoosenottoexitbecause
theycannotsynchronizetheiractionswiththeotherarbitrageurs.Acentralbankdeclaration
cancoordinatetheexitbehaviorandsoleadtoaquickdeflationofthebubble.
Ourdiscussionofpolicyresponseswilltakeplacealonganumberofhypotheses.Inallcases,
itshouldbekeptinmindthatouranalysisbydesigncanonlysuggesttheunderlyingtrade
offs,ratherthanyielddefinitivepolicyrecommendationsforthepresent.
Hypothesis1:Purecleaningiscostly
Apurecleaningpolicyimpliesthatinterventionsoccuronlywhenthebubbleburstsbyitself.
Thismaybeparticularlycostlybecauseofthelargeadjustmentneededatthispointintime.
One example of a cleaning policy is offered by the crisis of 1763, when no authority felt
responsible for or was capable of intervening to mitigate the enormous lending boom,
leadingtoadeepdepressionandthebreakdownofasignificantpartofthefinancialsystem.
Another example is the Australian crisis of 1893. Again, there was no policy intervention
tryingtomitigatethebubblesinminingsharesandlandortheaccompanyinglendingboom.
Andagain,thedisruptionsinboththefinancialsectorandtherealeconomyweresevere.
Hence,theevidencesupportstheviewthatpurecleaningiscostly.However,theevidence
also shows that pure cleaning strategies are found only in relatively immature financial
systems.Mostadvancedsystemsshowsomeformofpolicyresponses,manyofwhichcan
becharacterizedasleaning.EventheGreenspanpolicywasnotapurecleaningstrategy.
Hypothesis2:Leaninginterestratepolicymaymitigatecrises

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The most wellknown example of successful leaning is the Australian real estate bubble in
the early 2000s. When the Reserve Bank of Australia became more and more alarmed by
risinghousingpricesandstrongcreditexpansion,itfirstusedcommunicationtoemphasize
the longterm risks from these developments. Later, the Reserve Bank tightened interest
rate policy in several steps beginning in mid2000. Although these steps were officially
motivated by inflationary pressures and not explicitly targeted to asset prices, their effect
wasadecelerationofhousingpriceriseswithoutanyseveredisruptions.Thesuccessofthis
leaning policy also appears intimately linked to its timing: The central bank reacted at a
relatively early stage, long before the bubble could reach dangerous proportions, and so
deflationofthebubblerequirednosubstantialratehikes.
In other episodes, such as the Norwegian crisis of 1899, the relatively mild recession may
partly be due to an early increase in interest rates mitigating the real estate bubble,
although the evidence is less clear than for the Australian case. Overall, these episodes
suggestthataleaninginterestratepolicycaninprinciplebeeffectiveandavoidormitigate
crises.
However,somecaveatsareinorder.First,itisinthecaseoftheAustraliancrisisdifficult
to cleanly disentangle the effect of the leaning interest rate policy from the impact of
macroprudential measures, which were introduced at around the same time (as discussed
below).Second,weseeleaninginterestratepoliciesinmanyotherepisodesinoursample,
and most of these episodes nevertheless led to severe recessions. This suggests that the
implementation of leaning policies is far from trivial. Leaning interest rate policy may
becomeineffectiveifitcomestoolateoristooweakanditcanbeharmfulifitistoostrong,
leadingtoournexttwohypotheses.

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Hypothesis3:Leaninginterestratepolicymaybeineffectiveifitistooweakorcomestoo
late
Inmanyofoursampleepisodes,weseeinterestrateincreasespriortothecrisis,butthese
seem to have been too weak to curb the bubble. A telling example is the U.S. subprime
bubble.TheFedraisedinterestratesstartingasearlyas2004.However,thelevelofinterest
rateswasstilllowandhousingpricescontinuedtoriseuntil2006.Anotherexampleisthe
Grnderkrise of 187273, when interest rate increases were not sufficient to mitigate the
boominstocksandrealestate.
Inothercases,interestrateswereraisedataverylatestageofthecrisis.Forexample,inthe
Railway Mania in England during the 1840s, the Bank of England reacted relatively late to
speculation, and the bursting of the bubble led to a deep recession and one of Britains
worst banking panics. Another example is the U.S. stock price bubble in the late 1920s,
when interest rates were raised after the bubble had already grown to an unsustainable
level.Similarly,theincreaseininterestratescameverylateintheJapanesecrisis,andthe
economyenteredintoalonglastingdepressionsometimescalledthelostdecade.When
interestrateswerefinallyraised,theresponsewasoftenquiteharsh,leadingtothebursting
ofthebubble,discussednext.
Hypothesis4:Leaninginterestratepolicymaybeharmfulifitistoostrong
Inbothofthejustmentionedepisodes(theUnitedStatesin1929andJapanin1990),the
interest rate response was late but strong, contributing to the bursting of the respective
bubbles(pricking).White(1990,p.82)criticizestheFederalReserveforhavingpushedthe
U.S. economy even further into recession. Similarly, the Bank of Japan was criticized for
havingpromotedtherecessionbyprickingthebubble(Patrick,1998, p.12).However,the
18

counterfactualisunclear.Itiswellconceivablethatafurtherexpansionofthebubblewould
have led to an even more severe recession. Once asset prices have risen to unsustainable
levels,allpolicyoptionscanbecostly.
Buttherearealsoepisodesinoursamplewheretheprickingofabubblewasnotfollowed
byasevererecession.Forexample,thedeflationofsharepricesbyScottishfinancierJohn
LawintheMississippibubbledoesnotseemtohaveledtoaseveredisruption.Similarly,the
possiblyunintentionalprickingofthedotcombubblebyGreenspanledtoasharpdecrease
in stock prices and huge losses for the holders of dotcom stocks, but the effect on the
overalleconomywasmodestandthefinancialsystemwashardlyaffected.Hence,itisfar
from clear whether pricking is worse than not intervening at all and letting the bubble
collapse.
Overall, this substantial heterogeneity in experiences is an important reason for our
warinesstoderivedefinitivepolicyrecommendations.Nevertheless,apolicypreventingthe
emergenceofbubblesinthefirstplaceseemspreferabletoalatepricking.
Analternativetointerestrateinstrumentsaremacroprudentialtools.Underthiscategory,
weconsiderallmeasuresthatattempttoreducelendingthroughmeansotherthaninterest
rates.Examplesarequantityrestrictionsforlendingortheimpositionofloantovalueratios.
Infact,suchinstrumentswereusedinanumberofbubbleepisodes,andtheevidenceyields
someinterestinginsights.
Hypothesis5:Macroprudentialinstrumentsmaymitigatecrises
Intheearlycrisesinoursample,wedonotobservetheuseofmacroprudentialinstruments.
However,suchinstrumentsseemtohavegainedimportancesincethebeginningofthe20th

19

century.Anearlyandsuccessfuluseofmacroprudentialinstrumentsoccurredinthe1920
26 real estate bubble in the United States (see White, 2009). According to the National
Banking Act of 1864, national banks outside of the central reserve cities were subject to
loantovalue restrictions of 50 percent for real estate loans with a maturity of up to five
years.Moreover,totalrealestatelendingwaslimitedto25percentofabankscapital.This
mayhelpexplainwhymostbankssurvivedtheburstingbubblerelativelywellandwhythe
stabilityoftheentirefinancialsystemwasnotthreatened.Anotherpositiveexampleisthe
Australianrealestatebubbleintheearly2000s,whentheauthoritiesimposedhighercapital
requirements for certain loans, such as home equity loans. In combination with leaning
interestratepolicy,thisseemstohavebeenquitesuccessfulinavoidingdisruptions.
Butmacroprudentialpolicyissubjecttothesamepitfallsasleaninginterestratepolicy.In
several episodes, macroprudential policy was not able to prevent crises or may even have
been counterproductive. In the stock price bubbles of 1927 in Germany and 1929 in the
U.S.,centralbanksalsoappliedmacroprudentialtools.ReichsbankPresidentSchachtcurbed
stock market lending by threatening banks with restricted or even denial of access to
rediscountfacilities.Similarly,theFederalReservedeniedaccesstothediscountwindowfor
banksgrantingfurtherloansonsecurities.Inbothcases,thesepolicieswereveryeffectivein
reducingstocklending,butatthesametimetheyinducedaseverecrashinstockmarkets,
causing disruptions in the economy. Similar to other episodes discussed above, the
measures seem to have come too late and were too strong. With respect to the German
case,it hasbeen argued that the central bankpricked a nonexistentbubble. Although the
ensuing recession was mild, the economy may have evolved much more favorably in the
absence of pricking (Voth, 2003). Moreover, the decline in stock prices weakened banks

20

balancesheets.Theprickingofanonexistentbubble(throughleaninginterestratepolicyor
macroprudentialtools)iscertainlyundesirable.
There are other examples where macroprudential measures that seem reasonable in
principle were ineffective in practice. For example, the Japanese central bank introduced
quantitativerestrictionsin1990tolimitthegrowthrateofbanksrealestateloans,which
couldnotexceedthegrowthrateoftheirtotalloans.Thismeasureissaidtobeonereason
whytheincreaseinrealestatepricescametoahalt(KindlebergerandAliber,2011,p.285);
nevertheless,theeconomydidnotrecoverforalongtime.InFinland,theauthoritiestried
tolimitcreditexpansionbyraisingreserverequirementsbyupto12percentforbanksthat
didnotreducetheirlending.Itseems,however,thatthismeasurewasnotstrongenoughto
stopthecreditexpansionassomebankspreferredtocontinuelending(NybergandVihril,
1994, p. 15). In Thailand, the central bank required banks and finance companies to hold
highercashreservesforshorttermdepositsownedbyforeigners.Again,thismeasurewas
implementedrelativelylateandseemstohavehadaminoreffectonforeignborrowing.
Finally, the most wellknown example of macroprudential policies is that of the Spanish
authoritiesduringtherecenthousingbubble.Infact,Spainwasthefirstcountrytointroduce
countercyclicalmeasuresintheformofdynamicprovisioning.Interestingly,thesemeasures
didlittletolimittheoverallcreditexpansioningoodtimesbecause1)creditwassubstituted
through other sources, and 2) the measures were simply not strong enough. In contrast,
theywerequiteeffectiveinmitigatingthecreditcrunchinbadtimes(Jimnezetal.,2012).
Overall, the evidence suggests that macroprudential measures can be successful in
mitigatingcrises.Theirmainadvantageisthattheyaremuchmoretargetedthanmonetary
policymeasuresbecausetheycanbeapplieddirectlytothesectorswherebubblesemerge.
21

However,justaswithleaninginterestratepolicy,thetiminganddosageofmacroprudential
measuresareoftheessence.Whenappliedtoolate,theybecomeineffective.Moreover,a
late response may force sharp actions that often have disruptive effects. The Spanish
experiencepointstoanotherpotentialshortcomingofmacroprudentialtools,whichisjust
theothersideofthecoinofbeingmoretargeted:Theymaybecircumventedwhencreditis
substitutedfromothersourcesnotcoveredbytheregulation.This,inturn,isanadvantage
ofthebluntmeasures,whichcaptureallpartsofthefinancialsystem.
Hypothesis6:Centralbankscannotsimplytalkdownbubbles
Duringvariousbubbleepisodesinoursample,centralbankcommunicationappearstohave
had a clear impact on asset prices. For example, in Germany in the late 1920s, Hjalmar
Schacht,thenPresidentoftheReichsbank,publicallyvoicedhisdispleasurewithequityprice
developments and urged banks to curb lending for equity purchases. Similarly, in the
Australian crisis of the early 2000s, the central bank very explicitly telegraphed its policy
goals.Privatesectorexpectationsdulyadjusted,andthebubbleslowlydeflated.However,
thecommonthemeintheseandmanyotherverbalinterventionswasthecloselinkbetween
verbal message and future threatened or clearly signaled policy interventions. Without a
crediblethreatorpromiseofalaterpolicyresponse,itisnotclearwhetherthemereverbal
statementwouldinfacthavesufficedtomoveassetpricesinthedesireddirection.Indeed,
recent experience in the U.S. reinforces this skepticism. In the late 1990s, Fed Chairman
Greenspan on multiple occasions warned that equity prices were excessive, credit spreads
too narrow, or bank lending terms too generous. However, asset prices did not respond
markedly in the intermediate run to the Chairmans comments, suggesting that investors
barely update their beliefs about fair valuation after a mere verbal declaration by central
bankers(KohnandSack,2003).Overall,then,thereisnoclearempiricalevidencethatpure
22

verbal communicationunaccompanied by any credible outlook for actual future policy


adjustmentsisinfactcapableofsubstantiallymovingvaluations.

Conclusions
Ourpaperhasgivenanoverviewofinterestingbubbleepisodesinthepast400years.While
being highly selective,we hope to provide some interesting lessons for today. By the very
natureofouranalysis,wecannothopetoderiveanydefinitivepolicyrecommendationsand
so,inparticular,cannotpresentasimplesolutionthatwillworkunderallcircumstances.All
of the considered instruments worked well in some instances but failed in others. The
particular characteristics of the bubble matter, as does the economic environment.
Nevertheless,wecandistillthefollowinggenerallessons.
First,contrarytopopularwisdom,thefinancingofbubblesismuchmorerelevantthanthe
typeofbubbleasset.Bubblesinstocksmaybejustasdangerousasbubblesinrealestateif
thefinancingrunsthroughthefinancialsystem.Thefalloutfromburstingbubblesappearsto
be most severe when the bubble is accompanied by a lending boom, high leverage and a
liquidity mismatch of market players, and financial institutions participating in the buying
frenzy.
Second,apolicyofpassivelycleaningupthemessislikelytobeexpensive.Thehistorical
episodeswereviewedsuggestthatpolicymeasuresinmanycasescanindeedbeeffectivein
mitigatingcrises.Thisgeneralthrustoftheevidencenotwithstanding,thecomplexitiesofa
swift and precise identification of bubbles, coupled with the difficulty of gently deflating
them,remainseriousimpedimentstosuchproactiveapproaches.

23

Third, the timing of interventionsshould they be desiredis of the essence. Late


interventionscanbeineffectiveorevenharmfuliftheyenforcesharpmeasuresthatwould
suddenly burst the bubble and cause severe disruptions. This emphasizes the need for a
continuousmacroprudentialanalysisthatmonitorsimportanttimeseriesandtriestodetect
theemergenceofbubblesincertainmarketsegmentsatanearlystage,thusallowingforan
earlyandpreventiveintervention.
Fourth,noparticularinstrumentisfoundtobedominantindealingwithassetpricebubbles.
Interestratetoolsarebluntandalsoaffectpartsoftheeconomynotshowinganysignsof
overheating; however, they have the advantage of being less subject to circumventing
behavior. To minimize the adverse effects on the rest of the economyand, more
fundamentally, to ensure that asset prices remain at all sensitive to interest rate
fluctuationsearly intervention is necessary, underlining yet again the need for constant
monitoring.Incontrast,macroprudentialtoolscanbetargetedatspecificmarketsegments
or institutions, which can be useful in manycircumstances. But theyare alwayssubject to
regulatoryarbitrage.Bothinstrumentscanbeaccompaniedbyverbaldeclarations,butsuch
communicationmaynotbyitselfbesufficienttoappreciablychangevaluations.
Overall, leaning interest rate policies and macroprudential instruments appear to be
complementary.Shouldacentralbankindeeddecidethatanactivestanceagainstbubblesis
desirable,thenacombinationofmacroprudentialtoolsandactiveinterestratepolicyseems
preferable in many cases. As long as problems are detected in specific sectors or within
particular institutions, targeted macroprudential measures are sufficient. If the bubble is
more widely spread or if regulatory arbitrage is a serious threat, then a proactive interest
ratepolicymaywellbethebestwaytogo.

24

Sowhatdoesourpaperimplyforthecurrentsituation?Thissituationisdifferentfrommost
episodesinoursampleinthatrisingassetpricescoincidewithoverallweakness,bothinthe
realandthefinancialsectors,atleastinContinentalEurope.Inapostbustphasethereisa
tradeoff between preserving financial stability and getting the economy growing again.
Essentially,centralbankstrytoinducemarketparticipantstoinvestandtakeonmorerisk.
Thistendstoleadtomorefinancialrisktakingand,hence,lessfinancialstability.Insucha
situation,highassetpricesaredrivenbythecentralbankscleaningstrategyratherthanby
euphoria.
Whenbanksarevulnerableandleverageishighinallpartsoftheeconomy,leaninginterest
ratepolicyseemstobeabadoption.TheSwedishexampleistellinginthatrespect:When
the Swedish central bank raised interest rates in 2010 to dampen the boom in real estate
prices and the overborrowing of households, inflation fell sharply and even became
temporarily negative, raising the burden on debtors and plunging the economy back into
recession.Thisexampleshowsquiteplainlythatpolicyoptionsaretobejudgeddifferently
after a financial crisis than in boom times. If the macroeconomic environment is weak,
leverageishigh,andthefinancialsystemisfragile,leaninginterestratepolicycanbevery
costly.Macroprudentialtoolsmaybemoreappropriateinthatcontext.Theappearanceof
bubblesintheimmediateaftermathofafinancialcrisishasnoprecedentinoursampleof
bubbles.Furtherresearchisdesperatelyneeded.

25

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33

Event
Time
Place
Overview

Tulipmania
163437(crisis:Feb.1636)
Netherlands
Tulipmaniaisoneofthefirstprominent
speculativebubblesinhistory.Itrefersto
theextraordinaryriseinpricesfortulipsin
theNetherlandsduringthe17thcentury.
Themaniawentalongwiththe
introductionoffuturesmarkets,wherethe
bulbs,whichwereconsideredluxury
products,werepresoldduringtheyearfor
theseasonfromJunetoSeptember.Prices
rosedramatically,withnonprofessional
tradersbuyingbulbsoncreditprovidedby
thesellers.Whilenosevererecession
followed,economicactivitydeclinedafter
tulippricesfell.

Mississippibubble
Crisisof1763
171920(crisis:May1720)
1763(crisis:Sept.1763)
Paris
Amsterdam,Hamburg,Berlin
TheMississippibubblegoesbacktoJohnLaw,aScottish
TheSevenYearsWar(175663)wasaccompaniedby
immigrant,whoacquiredtheCompagniedOccidentinAugust aneconomicboomandarapidgrowthofcredit.
1717toadministertradewiththecolonyofLouisianaandwith Creditexpansionwasfueledbythefinancial
Canada.SpeculationinCompagniestocksemergedwhenthe innovationoftheacceptanceloan,asophisticated
Compagnieexpandeditseconomicactivitygreatly:Underthe formofbillsofexchange.Importantfeatureswere
thestrictregulationregardingtheenforceabilityof
newnameCompagniedesIndes,itcontrolledtradeoutside
Europe,acquiredtherighttomintcoinsandtocollecttaxes, theloan(Wechselstrenge)aswellasthejointliability
andfinallypurchasedmostnationalFrenchdebt.Lawaimedat ofallsignatoriesforobligationsfromthebill.Atthat
revivingtheeconomyafterthebankruptcyinducedbythewars time,Hollandtooktheroleasmaincreditor,
ofLouisXIVandatestablishinganeconomicsystemwherethe whereasPrussiacanbeconsideredanemerging
marketeconomyandHamburgwasinan
amplesupplyoffinancefosterseconomicactivity.Thus,he
facilitatedthesupplyofcreditbyintroducingpapermoneyand intermediaryposition.Theeasyavailabilityofcredit
byfoundingtheprivateBanqueGnraleinJune1716,which fueledcommodityspeculation,especiallyregarding
becameBanqueRoyale,apublicentity,in1719.Withthe
sugarandgrain,precipitatedasharpincreasein
BanqueRoyaleincreasingissuancetofacilitatestocksalesof assetprices.Thebubbleburstwhencommodity
theCompagnie,theamountofbanknotesinthemarketand
pricesdeclineddramaticallywiththecomingof
sharepricesspiked.Inflationsetinand,withthebeginningof peaceandcreditconditionstightened.Merchants
1720,marketexpectationschanged:Investorsstartedseeking suffereddirectandindirectlosses.Eventually,the
failureoftheDeNeufville,amajorbankinghousein
moresolidinvestmentopportunities,andconfidenceinthe
Amsterdam,causedapanic,whichrapidlyspread
papermoneyeroded.TheBanqueRoyalewastakenoverby
fromAmsterdamandHamburgtoBerlin.
theCompagniedesIndesinFebruary1720,whichstopped
backingitsownsharepriceswithbanknotes.Sharepriceswere
peggedtobanknotes,anddirectconversionbecamepossible.
Lawstarteddeflatingshareprices,graduallydismantlingthe
bubble.

Bubbleasset

Tulips

StocksofJohnLaw'sMississippiCompany

Grain,sugar

Typeofbubbleasset
Displacement

Commodities
Financialinnovation(futures)

Securities
Fiatmoney,the"Lawsystem"

Commodities
Financialinnovation(acceptanceloans),war

Holderofasset

Smalltowndealers,tavernkeepers,
horticulturalists,wealthyindividuals

Wealthypeople,theKingasaprincipalshareholder,former
stockholdersofBanqueGnrale

Merchantbankers

Event
Time
Financierofasset

Tulipmania
163437(crisis:Feb.1636)
Equityandcreditfromsellersofthebulbs;
nofinancialintermediaries

Economicenvironmentduringtheemergenceofthebubble
(1)Expansivemonetarypolicy No

Mississippibubble
171920(crisis:May1720)
Financingthroughbillsofstate,BanqueGnrale/Banque
Royale

Crisisof1763
1763(crisis:Sept.1763)
Billsofexchange(Amsterdaminvestors)

Yes:"()thecommercialschemechosenwastoprintmoney" No
(Garber,2000,p.98)

(2)Lendingboom

No

Yes:"Expansionofcirculatingcreditwasthedrivingforcefor
economicexpansion"(Garber,2000,p.107)

(3)Foreigncapitalinflows

No

Yes:StocksofCompagnied'OccidentandCompagniedesIndes Yes:Hollandasamajorcreditor,Prussiaasadebtor
wereboughtbyBritishandDutchinvestors
country

(4)Generalinflation

No

Yes"[..]theaveragemonthlyinflationratefromAugust1719
throughSeptember1720was4percent,withapeakof23
percentinJanuary1720"(Garber,2000,p.101)

Severityofcrisis

Yes

Yes:"Atthesametimeinflationbecamea
widespreadphenomenoninnorthernEurope,as
manyGermanstatesandothercountrieslike
Swedenfinancedthewarbydebasingtheir
currencies"(SchnabelandShin,2004,p.13)

Event
Time
(1)Severerecession

Tulipmania
163437(crisis:Feb.1636)
No:Negativeimpactonhousehold
consumptionbutnoseriousdistress

Mississippibubble
171920(crisis:May1720)
No:Noindicationofasevererecession

Crisisof1763
1763(crisis:Sept.1763)
Yes:Declineinindustrialproductionandstagnation
ofcredit;relativelyquickrecoveryinAmsterdamand
Hamburg,longtermrecessioninBerlin

(2)Bankingcrisis

No

No:Nogeneralbankingpanic,butrunonBanqueRoyale

Yes:Waveofbankfailures,contagiondueto
Wechselstrenge,firesales;butratheraliquiditycrisis
thansolvencycrisis

(3)Spillovertoothercountries No

Policyreactions
(1)Cleaning

No

Yes:CloseconnectiontoSouthSeaBubble;speculationinthe Yes:RepercussionsonLondon,Scandinavia
twocrisesaffectedDutchandnorthernItaliancitiesaswellas
Hamburg

Yes:IssuanceofadecreetoliquidatetheCompagniedesIndes
andtheBanqueRoyaleandtoreadjustpublicdebtonJanuary
26,1720;exchangeofexistingbillsandstocksagainstnew
publicobligations(valuebetween100%and5%oforiginal
obligations,dependingontheextentofspeculation)

Yes:InBerlin,FriedrichIIassistedmerchants,easing
thepressureoncreditmarketsbyrecallingoldcoins
andmintingnewonesinAmsterdamonthebasisof
creditsfromtheDutchbankers;nodirectpublic
interventioninAmsterdamandHamburg

Event
Time
(2)Leaningmonetarypolicy

Tulipmania
163437(crisis:Feb.1636)
No

Mississippibubble
Crisisof1763
171920(crisis:May1720)
1763(crisis:Sept.1763)
Yes:LawstopssupportingtheCompagniedesIndes'stockprice No
withbanknotesinFebruary1720;pegofsharepricesto
banknotesat9000livresandpossibilityofconversionofshares
intobanknotesbetweenMarch5andMay21(monetizationof
shares);decreeonMay1todeflatesharepricesto5000livres
untilDecember1

(3)Pricking

No

Yes: AfterthedecisionofMay1,1720todeflatesharepricesto No
5000livresuntilDecember1,thosesharepricesdroppedfaster
thanintended:to2000inSeptemberandto1000inDecember
1720

(4)Macroprudential
instruments

No

No

Sources

Garber(1989),Garber(2000),Kindleberger Conant(1915),Garber(2000),KindlebergerandAliber(2011)
andAliber(2011)

No

KindlebergerandAliber(2011),SchnabelandShin
(2004)

Event
Time
Place
Overview

Crisisof1772
LatinAmericaMania
RailwayMania
177273(crisis:June1772)
182425(crisis:Dec.1825)
1840s(crises:April/Oct.1847)
England,Scotland
England(mainlyLondon)
England
Thebubbleof1772wasaccompaniedbytheearly TheLatinAmericanMania,whichresultedin TheRailwayManiareferstothespeculativefrenzy
industrialrevolution,thusanincreasein
apanicinDecember1825,referstoastock duringthe1830sand1840s,whichwashaltedby
severalcrises.Speculationinrailwaystocksand
manufacturing,mining,andcivicimprovement. marketboom,relatedespeciallyto
Londonspeculatorsexcessivelytradedstocksand speculationinsecuritiesofrealandfictitious relatedassetswasmainlyfinancedbycheapcredit
futuresoftheEastIndiaCompany,whilesharesof SouthAmericangovernments(e.g.,Poyais) andforeigncapital.Largeamountsofcapitalwere
turnpikesandcanals,aswellasenclosuresand
andmines.Jointstockcompaniesaswellas boundinrailwayinvestments.Moreover,imports
buildingconstruction,surged.Speculationwas
cottonwerefurtherobjectsofspeculation.In becamenecessaryduetoabadharvestand
accompaniedbyalendingboom.Followingthe
thepeaceyearsaftertheNapoleonicWars, famine,forcingtheBankofEnglandtoincrease
restrictivepolicyofcharteredbanksinScotland, expansionarymonetarypolicyfueleda
interestrates.Bothaspectsledtoatighteningof
moneymarkets.Thebubbleburstin1845,when
competitorsexpandedcredit.AyrBankinScotland lendingboomandbankstendedtomake
wasfoundedtoincreasethemoneysupply.When riskierloans.Similardevelopmentstookplace tensionsaboutthesituationintherailwaymarket
thebanksstartingcapitalwasexhausted,itdrew inFrance,wherespeculationalsoextendedto andexpectationsofabadharvestentailed
achainofbillsonLondon.Thebubbleburst,when buildings.WhenthebubbleburstinLondon, decliningshareprices.However,thesituation
amaincreditorofAyr,theLondonbankinghouse thepanicprecipitatedasystemicbanking
becametenserandescalatedintotwopanicsin
Neal,James,FordyceandDown,closedonJune crisisandasevererecession.Whentrade
1847.WhilethecrisisofAprilwasprecipitatedbya
reversalofmonetarypolicy,distressinOctober
10,1772.AyrBankhadtosuspendpaymentsand slowed,distressstretchedouttobanksin
emergedwhentheBankofEnglandhaddifficulties
France,Leipzig,Vienna,andItaly.Latin
thepanicspread.Havingwidespread
repercussionsinEngland,Scotland,Amsterdam, Americaexperienceditsfirstsovereigndebt duetoasevereinternalandexternaldrainof
reserves.Inbothcases,investorswerenolonger
Stockholm,St.Petersburg,andthecolonies,the crisis.
situationonlycalmedafterthecooperative
abletomeetcallsforthesubscriptionofnew
interventionbyseveralcentralbanksandrich
shares.Britainexperiencedoneofitsworstbanking
panics,andthegovernmentdecidedtosuspend
men.
theBankAct(goldbacking).WhentheBankof
Englandfinallyintervened,thetighteningof
monetarypolicyworsenedthecrisis.

Bubbleasset

EastIndiaCompany,turnpikes,canals,enclosures, SecuritiesofSouthAmericangovernments
buildingconstruction
andmines,jointstockcompanies,cotton

Railwayrelatedsecurities,corn

Typeofbubbleasset
Displacement

Securities,realestate
Technologicalinnovation(industrialrevolution),
financialinnovation(swiveling,foundationofthe
AyrBankin1769)

Securities,commodities
Independenceofformercolonies,
privatizationofmines,lowerreturnson
Britishgovernmentbonds

Securities,commodities
Technologicalinnovation(railways)

Holderofasset

Londonspeculators,businessmen

Widelyheld:"Allclassesofthecommunityin Widelyheld:"fromtheclerktothecapitalistthe
feverreigneduncontrollableanduncontrolled."
Englandseemtohavepartaken"(Conant,
(Evans,1848,p.2)
1915,p.620)

Event
Time
Financierofasset

Crisisof1772
177273(crisis:June1772)
Bankcredit(AyrBank,countrybanks),billsof
exchange(moneybrokers),tradecredit

Economicenvironmentduringth
(1)Expansivemonetarypolicy Yes:Nocentralizedmonetarypolicy.Expansive
policybytheBankofEnglandafter1763.
CharteredbanksinScotlandadoptedrestrictive
policy.Thisencouragedcompetitors(e.g.,British
LinenCompany,localandprivatebanks)tofollow
anexpansivepolicyandissuenewnotes.

LatinAmericaMania
RailwayMania
182425(crisis:Dec.1825)
1840s(crises:April/Oct.1847)
Bankcredit(countrybanks,BankofEngland) Bankcredit,acceptances,foreigninvestments,also
savings

Yes:LiberalpolicybytheBankofEngland"to
commodatethegovernmentsfiscal
demands"(Bordo,1998,p.79)until1825;
expansionofmonetarybaseenabledan
increasingnumberofcountrybankstofreely
replacecoinageinthedomesticcirculation
andissuesmalldenominationbanknotes;
alsoopenmarketoperationsbytheTreasury

Yes:"eraofcheapmoney"(WardPerkins,1950,p.
76),e.g.,in1842,ratesofinterestwerereducedto
4%;marketdiscountrateswerebelow2%andthen
below3%in1844

(2)Lendingboom

Yes:"Accompanyingthemoretangibleevidence Yes:"creditwastheuniversalcurrency"
ofwealthcreationwasarapidexpansionofcredit (Evans,1859,p.15)
andbankingleadingtoarashofspeculationand
dubiousfinancialinnovation"(Sheridan,1960,p.
171)

Yes:Cheapcredit:"From1842discountshadbeen
easyandmoneyplentiful,thefundsmaintaineda
highrate;lowinterestonlycouldbeobtained"
(Evans,1848,p.2)

(3)Foreigncapitalinflows

No

Yes:Substantialamountofforeignrailway
investment

(4)Generalinflation

No:"expandingoutputofgoodskeptpacewith Yes:In1825:"sharpincreasein[]theprices Yes:Pricesincreasedfrom1843toearly1847


theincreaseinthesupplyofmoney..."(Hamilton, ofcommodities[].Therisingpricesinthe
1956,p.411)
latterhalfoftheyear1825reduced
purchases"(Conant,1915,p.621);also
compareSilberling(1924)

Severityofcrisis

No:Rathercapitalexportsandoutflowof
gold;decreaseofforeignholdingsofBritish
debt

Event
Time
(1)Severerecession

Crisisof1772
177273(crisis:June1772)
Yes:TheGentleman'sMagazinestatedthat"no
eventfor50yearspasthasbeenrememberedto
havegivensofatalablowbothtotradeand
publiccredit"(Sheridan,1960,p.172);credit
crisis,decreaseintrade,unemployment,rising
averagenumberofbankruptcies(310intheeight
yearsprecedingthepanic,484in1772,and556in
1773)

LatinAmericaMania
RailwayMania
182425(crisis:Dec.1825)
1840s(crises:April/Oct.1847)
Yes:Seriousrecessioninearly1826,"massive Yes:Seriousrecessionsimilarto1825,bankruptcies
waveofbankruptcies"(Neal,1998,p.65),
throughouttheU.K.
severeunemployment,contractionofloans

(2)Bankingcrisis

Yes:WaveofbankfailuresinLondonand
Edinburgh;AyrBankhadtosuspendpayments,
lateralsofailuresinAmsterdam

Yes:"systemicstoppage
ofthebankingsystem"(Neal,1998,p.53),
widespreadfailures(73outof770banksin
England,3outof36inScotland)

(3)Spillovertoothercountries Yes:CrisishadsevereeffectsinAmsterdam,which Yes:Asaresultofdecliningcontinentalsales,


alsospreadtoHamburg,Stockholm,St.
thecrisisspreadfromEnglandtoEurope
Petersburg(butwithout"seriousdisaster"inthe (especiallybanksinParis,Lyon,Leipzig,and
latterthree;seeClapham,1970,VolumeI,p.248) Viennawereaffected)andLatinAmerica,
whereitcausedasovereigndebtcrisis
aswellastocoloniesinIndiaandAmerica

Policyreactions
(1)Cleaning

Yes:BankofEnglanddiscountedheavily(hadto
hireadditionalclerks),governmentbailoutofthe
EastIndiacompany(loanof1.4millionand
exportconcessions),theBankinStockholm
supportedsoundbanks,EmpressCatherine
assistedBritishmerchants

Yes:OneoftheworstBritishbankingpanics;bank
runs,hoardingofmoney

Yes:BanksandbrokersfailedinParis,Frankfurt,
Hamburg,andAmsterdamduetodecliningshare
prices;alsoeffectswerefeltinNewYork;impact
ontradebetweenIndiaandBritain

Yes:First"Policyofcontractionduringthe
No:BankofEnglandwascriticizedfornotactingas
firstdaysofpaniccausedabsoluteparalysis alenderoflastresort;suspensionoftheBankAct
ofbusiness"(Conant,1915,p.621)then
changeinpolicy;criticaldebateastowho
shouldactaslenderoflastresort;finally
BankofEnglandgrantedadvancesonstocks
andexchequerbills,alsoheavydiscounting,
aidbytheBanquedeFrancetoprevent
suspensionofconvertibility

Event
Time
(2)Leaningmonetarypolicy

Crisisof1772
177273(crisis:June1772)
Yes:Earlyin1772,BankofEnglandincreasedthe
discountrateand"triedtoputabrakeonover
tradingbyaselectivelimitationofitsdiscounts,a
policywhichithadoftenadoptedbefore"
(Clapham,1970,VolumeI,p.245)

LatinAmericaMania
RailwayMania
182425(crisis:Dec.1825)
1840s(crises:April/Oct.1847)
Yes:Riseininterestratesduetodrainofbullion,
Yes:Inviewofdecliningreservesand
"Alarmedatthespeculativespiritabroad,the especiallyafterfoodimportssinceOctober1845,
BankofEnglandwerethefirsttoadopt
whenbubblehadalreadyburst;criticismthatBank
precautions,bycontractingtheircirculation; ofEnglandreactedtoolatetospeculation
andtheexamplewasfollowedbythecountry worsenedthepanic;increaseinminimuminterest
banks"(Evans,1859,p.15).Contractive
rate(3%inOctober1845,3.5%inNovemberuntil
policybytheBankofEngland,mainlythrough August1846,4%inJanuary,5%inApril1847)
divestingExchequerbillstocutcirculation
beginninginMarch1825,againinMayand
June,andfromSeptember

(3)Pricking

No

Possibly:"unclearwhatcausedtheApril1825 No
collapse,buttheBankofEnglandhadin
MarchsoldaverylargeblockofExchequer
bills,presumablyto'contractthecirculation'"
(Bordo,1998,p.77)

(4)Macroprudential
instruments

No

No

Sources

Clapham(1970),Hamilton(1956),Hoppit(1986), Bordo(1998),Conant(1915),Evans(1959), Clapham(1970),DornbuschandFrenkel(1984),


KindlebergerandAliber(2011),Sheridan(1960)
KindlebergerandAliber(2011),Neal(1998), Evans(1848),IMF(2003),KindlebergerandAliber
Silberling(1924)
(2011),WardPerkins(1950),

No

Event
Time
Place
Overview

Panicof1857
Grnderkrise
185657(crisis:Oct.1857)
187273(crisis:May1873)
UnitedStates
Germany,Austria
Thecrisisof1857isconsideredthefirst
Excessivespeculativeactivitiesinstocksand
worldwidecrisis.HavingitsoriginsintheUnited realestatewereoneofthemainunderlying
causesoftheseverecrisisattheendofthe
States,itquicklyspreadtoBritain,continental
Europe,andthecolonies.Thespeculativebubble 19thcenturyincontinentalEurope.Over
expansionduringthesocalledGrnderjahre
precedingtheturmoilemergedagainstthe
backdropofgolddiscoveries,railwayextension, inGermanyandAustriawasfacilitatedbyan
andaglobalboom.Foreigninvestorsadditionally expansionofbankcreditforexample,
contributedtorisingvaluesofrailroadsecurities throughnewtypesofbanks(e.g.,
MaklerbankenandBaubanken).Inaddition,
andlandintheU.S.However,increasing
Frenchwarreparationswereusedtoexpand
uncertaintyaboutthefuturestatusofslavery
themoneysupply.Optimisticexpectations
(DredScottdecision)reducedtheterritories'
andeuphoriainthecontextoftheWorld
attractiveness.Whileconditionsinthemoney
markethadalreadytightenedseveralyearsbefore Exhibitionaswellasreformofthestock
thecrisis,interestratesinNewYorkrosesharply corporationlawfurtherfueledspeculation.
fromJunetoAugustof1857.Thesituation
Whereassignsoftroublehadbeenevident
escalatedinSeptemberafterthefailureofthe
before,thebubbleburstinMay,whenthe
WorldExhibitioninViennaopenedwith
OhioLifeandTrustCompany,whichhadbeen
disappointingsales.Thesharpdropinstock
involvedinfraudulentpractices.Depositors
pricesandtheclosureoftheViennastock
hoardedtheirmoney,anddepositwithdrawals
peakedwithabankruninNewYork.Distressed exchange(BlackFriday)werefollowedbya
salesaggravatedthesituationamongbanksand bankingcrisis.Despitebailoutsandother
farmers.Thefederalgovernmentwasunableto emergencymeasures,thecrisiscouldnotbe
interveneeffectively.Asevererecession,including containedanditdevelopedintoaruinous
depression.
numerousfailuresandpricedeclines,wasthe
result.Onlythejointeffortsofbanksfinally
calmedthesituation.

Chicagorealestateboom
188183(nocrisis)
Chicago
TheChicagorealestateboomatthe
beginningofthe1880swasrootedinthe
recoveryfromtheseriousdepressionof
1877.Againstthebackdropofimproving
economicconditions,Chicago,consideredan
importanteconomiccenter,benefitedfrom
increasingwagesandprofits.Thus,nearly
everyclassofsocietyaccumulatedlarge
wealth,andrealestatewasconsideredthe
mostattractiveinvestment.Incombination
withincreasingimmigration,thisledto
soaringrents,demandforhousing,and
growingapartmentconstruction.In
referencetothelatter,thisperiodisalso
knownas"theflatcraze."However,withthe
beginningoftherecessionof1883,the
bubbleburst,albeitwithoutsevere
consequences.

Bubbleasset

Railroadstocksandbonds,land

Stocks,railroads,houses,land

Newbuildings,housesfromforeclosure
proceedings,land

Typeofbubbleasset
Displacement

Securities,realestate
Golddiscoveries,railwayextension

Securities,realestate
Endofwar,WorldExhibition,liberalization
(banks,stockcorporationlaw)

Realestate
Innovation(apartments,skyscrapers),
railroadconstruction,immigration

Holderofasset

Widelyheld

Widelyheld,alsobybanks(cf.Wirth,1890,
pp.474ff.)

Widelyheld:capitalists,businessmen,
mechanics,laborers,railroadand
manufacturingcompanies

Event
Time
Financierofasset

Panicof1857
Grnderkrise
185657(crisis:Oct.1857)
187273(crisis:May1873)
Bankcredit(domesticandforeignbanks),
Bankcredit
promissorynotes(sellers),debtforequityswaps
(railroadcompanies),foreigninvestments,private
capitalists

Economicenvironmentduringth
(1)Expansivemonetarypolicy Yes:Noteissuancenotcentralized;NewYork
bankscouldexpandloansduetoincreasein
specie

Chicagorealestateboom
188183(nocrisis)
Toalargeextentequityfinanced

Yes:Warreparationswereusedtostrikenew Yes:Mortgageinterestrateswereat
goldcoins,andsomefederalstatesincreased extremelylowlevelsin1877;rateofgrowth
moneyemissionrightsforsomebanksor
ofU.S.moneystockwasextraordinarilyhigh
foundednewcentralbanks
from1879to1881:over19%p.a.(Friedman
andSchwartz,1963,p.91)

(2)Lendingboom

Yes:Despitearapidincreaseinthenumberof
banks,theywerenotabletomeetthedemand
forloans

Yes:"creditatbankswasstretchedtothe
limit"(KindlebergerandAliber,2011,p.52)

No:Ratherequityfinanced;largewealthhad
beenaccumulatedby1879amongallranks
ofsocietyandwasmadeavailablefor
investment

(3)Foreigncapitalinflows

Yes:ForeigncapitalfromEngland,alsoGermany
andFrance

Yes:Frenchwarreparations

No

(4)Generalinflation

No:"Pricesdidnotadvanceinproportiontothe Yes:"Allofthishadthecombinedeffectof
increaseinthevolumeofmetallicmoney[]
raisingthepricesofeverything,especially
becausealargepartofthenewmoneywas
rents,wagesandtheproductsofindustry"
absorbedbythelateralexpansionofcommercein (McCartney,1935,p.79);peakin1873with
quantity"(Conant,1915,p.637)
anindexof114.3basedonpricesin1860

Severityofcrisis

Yes:"Risingpricesandprofitsmargins
speededupproduction,increased
employment,andfurnishedthefundsfora
brieferaofspeculationthatculminatedin
1883"(Hoyt,1933,p.128)

Event
Time
(1)Severerecession

Panicof1857
185657(crisis:Oct.1857)
Yes:8.6%GDPcontractionintheU.S.(Bordo,
2003,p.65),waveofcompanyfailures,
decreasingprices

(2)Bankingcrisis

Yes:Waveofbankfailures,hoardingofmoney, Yes:Sharpdecreaseinprofitabilityandcredit No
anddepositwithdrawals,bankruninNewYorkon volume;increaseininsolvencies,alsofire
October13;suspensionofconvertibility
sales
throughoutthecountry

Grnderkrise
Chicagorealestateboom
187273(crisis:May1873)
188183(nocrisis)
Yes:Manufacturerssufferedsincepurchasing No
powerwasgreatlyreduced;"ruinofGerman
industryseemedtobeathand"(McCartney,
1935,p.78);numerousinsolvenciesinAustria

(3)Spillovertoothercountries Yes:Firstworldwidecrisis;spreadtocontinental Yes:ImmediateeffectsonItaly,Switzerland, No


EuropeandBritain,hadeffectsinSouthAmerica, Holland,andBelgium;inSeptemberpanic
reachedtheUnitedStates;spillovertoGreat
SouthAfrica,andFarEast
Britain,France,Russia

Policyreactions
(1)Cleaning

No:"Ananalysisofthecrisisof1857suggested
thattheFederalgovernmentwasincapableof
interveningeffectivelyandthatthepublic,
includingthebanks,wasleftwithoutguidanceto
stemthecrisis"(KindlebergerandAliber,2011,p.
219)

Yes:InAustria,bailoutoftheBodencredit
No
Anstaltbythecentralbankandabank
consortium;suspensionoftheBankActof
1862toallowforcentralbankassistancein
caseofaliquiditycrunch;syndicateof
bankerswasestablishedtomakeadvanceson
soundsecurities;theTreasurygrantedloans

Event
Time
(2)Leaningmonetarypolicy

Panicof1857
185657(crisis:Oct.1857)
No

Grnderkrise
Chicagorealestateboom
187273(crisis:May1873)
188183(nocrisis)
No
Yes:Butprobablytoolateandtoolittleto
preventthecrisis;NationalBankofAustria
HungaryraisedinterestratesinJuly1869,in
1872,andinMarch1873upto5%for
exchangeand6%forLombardloans

(3)Pricking

No

No

No

(4)Macroprudential
instruments

No

No

No

Sources

Conant(1915),CalomirisandSchweikart(1991), Burhop(2009),Conant(1915),McCartney
Evans(1859),KindlebergerandAliber(2011),
(1935),Schwartz(1987),Wirth(1890)
Gibbons(1858),Riddiough(2012),Riddioughand
Thompson(2012)

Hoyt(1933)

Event
Time
Place
Overview

Crisisof1882
Panicof1893
188182(crisis:Jan.1882)
189093(crisis:Jan.1893)
France
Australia
TheFrenchstockmarketbubbleemergedduringa
Afterthegoldrushes,Australiaexperiencedalong
boomperiodandmainlyinvolvedtheBoursesinParis boomperiodduringthe1880s,whichwentalong
andLyon.Duetothesuccessofnationalsecurities,
withaspeculativeboominrealestatevaluesand
investorsbelievedinthesafetyofallkindsofsecurities. miningshares.TheAustralianfinancialsystemwas
MassesoftheFrenchpopulationfellintoeuphoria.A relativelyimmature:Nocentralbankexisted,while
maintriggerwasthefinancialinnovationofnegotiable littlelegalregulationrestrictedbanks.Stock
securitiesandforwardcontracts,implyingthat
exchangeswereonlyestablishedtocreateamarket
purchasersmadeadownpaymentandborrowedthe forminingstocks,andspeculationinthelatterwas
restfromanagentdechangewhohimselfborrowedin moreimportantthantransactionsinindustrial
thecallmoney(reports)market.Besidesthesystemof shares.Thespeculativebubblewassupportedbya
reportage,capitalinflowscontributedtotheboom.
lendingboom,whilethebanksthemselveswere
Confrontedwithfallingreserves,theBanquedeFrance heavilyengagedinthesemarketsandaccumulated
wasforcedtocontractmonetarypolicyinautumn
moreandmorerisks.Distressmanifestedwhen
1881,eventhoughitintendedtoavoidasharpincrease BritishcapitalwaswithdrawnaftertheBaring
ofthediscountrate.Consequently,interestratesfor failure.Inaddition,moreandmoredepositors
reportsincreased.WhentheAustriangovernment
withdrewtheirmoney,sincetheyexpectedbanks
refusedtograntaconcessiontotheBanquedeLyon, wouldbeunabletorolloverdebt.Eventually,panic
sharepricesfell.InJanuary,UnionGnrale,which
brokeoutinJanuary,whentherelativelynewly
playedacrucialroleduringtheboom,failedandpanic establishedBankofMelbournecollapsed.The
brokeout.Thevaluesofallclassesofsecurities
consequencewasseverefinancialdistress.ByMay,
plummeted.Investorsintheforwardmarket
14commercialbankshadfailed,whileonly12
experiencedhugelosses,andtheBoursedeLyonhad weatheredthecrisis.Besidessevererealeffectson
toclose.Despiteeffortsbyaconsortiumofbanks,as theAustraliaeconomy,thecrisisalsohadan
wellastheBanquedeFrance,tofightthefinancial
internationaldimension.ItspreadtotheUnited
States,andrepercussionswerefeltalsoinBerlin,
crisis,theirinterventionscouldnotavertadeep
Vienna,andItaly.
recession.

Norwegiancrisis
18951900(crisis:July1899)
Norway
Increasingexportsandeconomicactivityin1894and
1895propelledabubbleintheNorwegianrealestate
market.Atthesametime,bankscouldtakeadvantageof
theboomingstockmarkettogetcheapcapital.While
interestratesdeclined,reachingalowin1895,bank
lendinggrowthaccelerated.However,thegoldstandard
putlimitsonthescopeofNorgesBank.TheBankwas
forcedtoraiseinterestratesthroughout1898asaresult
ofdecliningexports.Priortothecrisis,theBankhadlow
reservesasaresultoflargecreditgrowth.Consequently,
astheBankbecamepronetogolddrains,uncertainty
spreadandliquidityconditionstightened.Thecrisisbroke
inthesummerof1899andwastriggeredbythefailureof
Chr.Christophersen,ahighlyleveragednonfinancialfirm.
WhilefinancialdistressmainlyconcernedbanksinOslo,
severalNorwegiancitieswereaffectedbyarealestate
crash.Duetostableinternationalgrowthaswellas
supportfromthecentralbank,thecrisisin1899and1900
wasmoderate.NorgesBankalsoplayedacentralrolein
restructuringandliquidatinginsolventbanks.Hence,the
crisisof1899,consideredthefirstmajorbankingcrisisin
Norway,waslessseverethanlatercrises.Nonetheless,
thenetwealthofhouseholdsandfirmsdeclinedduetoa
fallinassetprices,andcreditconditionsthroughoutthe
countryworsened.

Bubbleasset

Securitiesingeneral,stocksofnewbanks

Land,newhomes,realestateshares

Typeofbubbleasset
Displacement

Securities
Securities,realestate
Financialinnovation(negotiablesecurities),paymentof Golddiscoveries,populationgrowth,financial
warreparationsaftertheFrancoPrussianwar
deregulation(e.g.,landacceptedascollateral,no
limitonnoteissuance)

Realestate
Exportboom,1894Parliamentdecisiontoexpand
railways

Holderofasset

Widelyheld:"massesoftheFrenchpeople"(Conant,
1915,p.659)

Constructionsector,manufacturers,brokers,stock
marketinvestors

Miningshares,land

Banks,foreigninvestors,households

Event
Time
Financierofasset

Crisisof1882
188182(crisis:Jan.1882)
Bankcredit(banks,caissesdereports),alsoequity
financed(Frenchpeople)

Economicenvironmentduringth
(1)Expansivemonetarypolicy Yes:MeandiscountrateoftheBanquedeFrancein
1875was4%comparedto2.5%in1880;mean
circulationincreasedbetween1875and1880

Panicof1893
189093(crisis:Jan.1893)
Creditbynonbanks(pastoralcompanies,building
societies,landmortgagecompanies)andbanks
(tradingbanks)

Norwegiancrisis
18951900(crisis:July1899)
Bankcredit(especiallycommercialbanks)

Yes:Nocentralbank,buttradingbankswerenote
issuingbanksandexpandedthemonetarybase

Yes:Themonetarybaseincreasedinthe1890sdueto
specieinflowsfromexports;NorgesBankdidnotsterilize
theinflow;discountratebegandecreasinginJanuary
1892,reachingitslowin1895

Yes:Accelerationofbanklendinggrowthsincethemid
1890s;"theshareofoverallcreditoutstandinggrantedby
banksrosemarkedly"(Gerdrup,2003,p.9)

(2)Lendingboom

Yes:Expansionofcreditthroughasystemofdelayed
payments(reportage),existenceof"manydifferent
institutionalavenuesfortheexpansionofcredit"
(KindlebergerandAliber,2011,p.63),rapidincreasein
thenumberoftrustcompanies,investmentsocieties,
andsyndicates

Yes:"...nearlyeverylittlecommunitysupported
branchesofalltheleadingbanks,andobtained
excessiveloansonpropertywhichcouldnotbe
convertedintoquickassets"(Conant,1915,p.695)

(3)Foreigncapitalinflows

No

No:Inflowsofforeignexchangeduetotherepatriationof
Yes:Britishpublic,investmentandfinancial
companiesthatinvestedheavilyinAustralianmines incomesfromshippingservicesandexports,netforeign
andspeculatedinAustralianrealestate
claimsofprivatebanksin1899

(4)Generalinflation

No(Maddison,1991)

No:Pricesrelativelystablebetween1870and1890

Severityofcrisis

No:Pricelevelfellinthefirsthalfofthe1890s,buta
sharpincreaseoccurredin1898

Event
Time
(1)Severerecession

Crisisof1882
188182(crisis:Jan.1882)
Yes:"ThespectacularcrashoftheFrenchstockmarket
in1882inauguratedadeeprecessionthatlasteduntil
theendofthedecade"(White,2007,p.115)

Panicof1893
189093(crisis:Jan.1893)
Yes:"Theeventualdownturninthepropertymarket
ledtoaseverefinancialcrisisandadepression
unequalledinAustraliasexperience"(Bloxhamet
al.,2010,p.12);10%realoutputdeclinein1892
(1893:7%),largeinvestmentactivitydampenedfor
almost20years,deflation

(2)Bankingcrisis

Yes:Afterbankruptciesamongmanybrokersand
clients,banksandtheircaissescollapsed,runsand
subsequentfailuresoftheBanquedeLyonandUnion
Gnrale

Yes:Smallnumberofbanksfailedin1892,13of22 Yes:ButconcernedmainlybanksinOslo;moderatebank
runs
noteissuingbanksfailedin1893,"collapseofa
significantproportionoftheAustralianfinancial
system"(Kent,2011,p.126),especiallynonbank
financialinstitutions

(3)Spillovertoothercountries No

Policyreactions
(1)Cleaning

Yes:AssistancetoUnionGnraleaswellastobrokers
byaconsortiumofParisbanksheadedbytheBanque
deParisetdesPaysBas(Parisbas)andanothergroup
headedbytheRothschildhousetowinsometimeuntil
theendofJanuarysettlementandtoworkout
arrangements;laterLyonbrokersreceived100million
francsfromtheBanquedeFranceuponsecuritiesthat
wouldnotordinarilyhavebeenaccepted;theParis
agentsofexchangereceived80millionfrancsuponthe
guaranteeofasyndicateofbankers;BanquedeFrance
itselfreceivedaidfromtheBankofEngland.

Norwegiancrisis
18951900(crisis:July1899)
No:Impactoncreditconditionsandconfidence,butonly
moderateeffectsduring1899and1900;morebroad
basedrecessionanddeflationfrom1901to1905dueto
internationalrecession

Yes:ShockspilledovertotheUnitedStatesandalso No
affectedstockmarketsinBerlin,Vienna,Austria
Hungary,andItaly

Yes:Crisiswassolvedwithoutinterventionbythe Yes:NorgesBankprovidedliquiditysupportandwas
involvedintheorderlyrestructuringprocessand
colonialgovernments;Queenslandgovernment
liquidationofinsolventbanks,privateliquidationof
rescuedNationalBank;governmentintendedto
preventliquiditycrisisbypassingtemporary
smallercommercialbanks;governmentsupportto
legislationmakingprivatelyissuedbanknoteslegal Industribanken; NorgesBankexperiencedlossesinthe
tender;Victoriagovernmenturgedbankstogive
aftermathofthecrisis
financialassistancetooneanother,proclaimedbank
holiday;intheendrestructuringoftheCommercial
Bankaswellasotherbanks,whichendedthecrisis

Event
Time
(2)Leaningmonetarypolicy

Crisisof1882
Panicof1893
188182(crisis:Jan.1882)
189093(crisis:Jan.1893)
Yes:TheBanquedeFrancewasconfrontedwith
No
decliningreservesduetobadcropsandincreasinggold
flowstotheU.S.;BanquedeFrancetriedtoavoida
sharpincreaseinthediscountrateandthereforepaid
lightcoinandchargedapremiumforbullion,buthad
toraiseinterestratesby1percentagepointon
October20,1881

Norwegiancrisis
18951900(crisis:July1899)
Yes:Restrictionsduetogoldstandard;increaseofthe
discountratefrom4%to5.5%through1898duetodrop
inexports,thenarisefrom5%to6%inFebruaryand
Marchoneyearlater

(3)Pricking

No

No

No

(4)Macroprudential
instruments

No

No

No

Sources

Conant(1915),KindlebergerandAliber(2011),
Maddison(1991),White(2007)

Bloxhametal.(2010),Conant(1915),Kent(2011),
Lauck(1907),McKenzie(2013),Merrett(1997)

Gerdrup(2003)

Event
Time
Place
Overview

RealestatebubbleintheU.S.
Germanstockpricebubble
U.S.stockpricebubble
192026(nocrisis)
1927(crisis:May1927)
192829(crisis:Oct.1929)
UnitedStates
Germany
UnitedStates
TheU.S.housingbubbleofthe1920scan
Thestockmarketcrashof1927issometimes Thelate1920sU.S.stockpricebubble
partlybeattributedtopostwarrecoveryand referredtoastheonsetofGermany'sGreat culminatedinoneofthemostshattering
Depression.Followingtherecoveryofthe
stockmarketcrashesinU.S.history,the
coincideswithanagriculturalboom.Loose
monetarypolicyignitedalendingboomand severepostWorldWarIhyperinflation,the "BlackTuesday"ofOctober1929.Owingto
contributedtoincreasingvaluesofresidential Germaneconomyexperiencedaboomwith theprosperityandincreasingprofitsofthe
realestate.Inaddition,securitizedmortgages risingemploymentandexportsandstable
RoaringTwenties,speculationblossomedin
playedacentralrole.However,mortgages
inflation.Atthesametime,stockpricesrose, theUnitedStates.Moreandmore
wererathershorttermandfinancial
andspeculativepurchasesfinancedbybank Americansinvestedheavilyinstocks.
creditaswellasforeigncapitalinflows
regulationprescribedalowloantovalue
RestrictivepolicybytheFederalReserveto
ratio.Banksremainedprudentlendersand increased.Investmentwaslargelyfinancedby containthecreditboomandcurb
shorttermmoneymarketcreditinsteadof speculationwasineffective.Whilebroker
wererelativelywellcapitalized.Whenthe
loansbybanksdeclined,otherfinanciers
bubbleburstandrealestatevaluesdeclined, capitalmarketlending.Tocounterboth,
thenumberofforeclosuresincreased;
substitutedforit.However,inviewofan
ReichsbankpresidentSchachtsuccessfully
however,further,ifany,distresswas
urgedbankstoreducelendingforspeculative oncomingrecession,expectationsbeganto
containedregionally.Sincetheriskiest
useinMay1927.Asaconsequence,thestock changeinthesummerof1929.Whenthe
securitizedassetswereprimarilyinthehands marketfellby11%inoneday("BlackFriday FederalReserveBankofNewYorkraised
interestratesinAugust,itprickedthe
1927").Thecrashreducedmarginlending
ofinvestorsbutnotheldbyfinancial
institutions,thelatterwerelessaffectedand andtherebyinvestment.Confidenceeroded, bubbleandprecipitatedthecrisis.Whilethe
directeffectsofthecrashwerefirstconfined
nosystemicbankingcrisisemerged.Losses stockmarketliquiditydeclined,andfirm
balancesheetsweakened,furthercurtailing tothestockmarketduetopromptactions
forbanksweremodest.
bytheNewYorkFed,increasinginterest
investment.WhenGermanyslidinto
rates,distressedsales,andfallingindustrial
recession,theeconomywasinaweak
positionduetoalreadydeterioratedbalance productionsoonaggravatedthesituation.
Thecrashthusmarkedthebeginningofthe
sheets.
GreatDepression,affectingallindustrialized
economies.

Bubbleasset

Residentialhousing,alsosecuritized
mortgages

Typeofbubbleasset
Displacement

Realestate
Securities
Lowinterestrates,postwarrecovery,
Endofhyperinflationandeconomicrecovery
deregulation(legalizationofprivatemortgage
insurance)

Securities
Innovation(developmentofanindustrial
securitiesmarket,productivity
improvements)

Holderofasset

Banks,privateindividuals(domestic)

Widelyheld;alsocommercialbanks(and
theirsecuritiesaffiliates)

Stocks

Wealthyindividuals,institutionalinvestors,
banks

Stocks(companies,utilities)

Event
Time
Financierofasset

RealestatebubbleintheU.S.
192026(nocrisis)
Bankcredit(savingsandloans,mutual
savingsbanks,commercialbanks,insurance
banks),informallending(family,friends,etc.)

Economicenvironmentduringth
(1)Expansivemonetarypolicy Yes:Interestratewasloweredin1925,
remainedatlowlevelsin1926

Germanstockpricebubble
1927(crisis:May1927)
Stockmarketlending(banks,foreign
investors)

U.S.stockpricebubble
192829(crisis:Oct.1929)
Stockmarketcredit(domesticbanks,later
privateinvestors,corporations,andbanksin
Europe/Japan)

Yes:Discountratewasreducedinseveral
steps(10%onaveragein1924,9%in
February1925,andareductioninfoursteps
to6%inJune1926),butReichsbanklost
powerovermoneysupplyduetogold
standard(freecapitalflows);discountrate
washigherthanthemoneymarketrate

Yes:NewYorkFedhadalreadydecreased
discountratefrom4.5%inAprilto3%in
August1924;discountratesofallFedbanks
decreasedfrom4%to3.5%fromJulyto
September1927;alsoopenmarket
purchases

(2)Lendingboom

Yes:Especiallyrapidexpansionofmortgage
credit

No:Sharpincreaseinstockmarketlending
during1926and1927,butlevelwasstill
belowprewarvolume

Yes:"Thiseagernesstobuystockswasthen
fueledbyanexpansionofcreditintheform
ofbrokers'loansthatencouragedinvestors
tobecomedangerouslyleveraged"(White,
1990,p.68),butcreditconditionsingeneral
weretight

(3)Foreigncapitalinflows

No:USAasamajornetlender

Yes:Inflowoflongandshorttermforeign
fundsduring1926,butsharpdeclineafter
Reichsbankinterventionattheendofthe
year

Yes:LoansfromforeignbanksinEuropeand
Japansubstitutedforbankloansafterthe
interventionbytheFed

(4)Generalinflation

No:"Greatmoderationofinflationafter
WorldWarI"(White,2009,p.11)

No:Afterhyperinflation,lowandstable
inflationin1925and1926

No:In1928and1929,theconsumerprice
indexdeclined;nosignificantincreaseinthe
monetarybase

Severityofcrisis

Event
Time
(1)Severerecession

RealestatebubbleintheU.S.
192026(nocrisis)
No

Germanstockpricebubble
1927(crisis:May1927)
No:Mildrecession(investmentfell,noeffect
onconsumerspending),whichlaterturned
intotheGreatDepression

U.S.stockpricebubble
192829(crisis:Oct.1929)
Yes:Onlymoderatedirecteffectsonwealth,
butconfidenceandhouseholds'balance
sheetswereweakened;latercameGreat
Depressionwith29.7%contractioninGDP
(Bordo,2003)

(2)Bankingcrisis

No:Declineinhousingpricesandincreasein No:Butburstingbubbleweakenedbanks'
foreclosurerates,butonlymodestlossesfor balancesheets,whichmayhavecontributed
banks;80%offailureswereinruralareasand tothebankingcrisisof1931
mainlyrelatedtoexpectationsinagriculture;
runsandfailuresofcertainbankchains,but
nogeneralbankingcrisis:"failuresdidnot
imperilthewholeofthebankingsystem"
(White,2009,p.46)

No:Later;atfirstabankingpanicwas
prevented,owingtointerventionsbythe
NewYorkFed,andthedirectfinancial
effectsofthecrashwerelimitedtothestock
market(alsoincludeddistressedsalesand
margincalls)

(3)Spillovertoothercountries No

No

Yes:Nodirecteffectsofthecrash,but
reductioninU.S.lendinghadimpacton
Germany,LatinAmerica,andAustralia.
Later,theGreatDepressionaffected
countriesworldwide.

Policyreactions
(1)Cleaning

No

No:RestrictivepolicybytheFed,aresultof
fearsaboutexcessivespeculation,worsened
therecession;however,actionsbytheNew
YorkFed(despiteresistancefromtheBoard)
shortlyafterthecrashmadesurethat
moneymarketratesremainedstableand
memberbankswerenotthreatenedby
defaultingloansonsecurities

No

Event
Time
(2)Leaningmonetarypolicy

RealestatebubbleintheU.S.
Germanstockpricebubble
192026(nocrisis)
1927(crisis:May1927)
No:Nochangeininterestrates;rather,useof No:Onlyafewmonthsbeforethecrisis,
macroprudentialinstruments
beginninginOctober1926;discountratewas
reducedfrom6%to5%towardtheendof
1926

(3)Pricking

No

Yes:Reichsbankinterventionprickedthe
Yes:Restrictivepolicypossiblycontributed
bubble,"...crashinducedbythecurtailment totheburstingofthebubbleandworsened
ofmarginlending..."(Voth,2003,p.87)
therecession;"Insteadofallowingthestock
marketbubbletoexpandandburstofits
ownaccord,theFederalReserve'spolicies
helpedtopushtheeconomyfurtherintoa
recession"(White,1990,p.82)

(4)Macroprudential
instruments

Yes:Longstandingquantitativeregulations;
NationalBankingActof1864:Fornational
banksoutsidethecentralreservecities(New
York,Chicago,St.Louis)theloantovalue
ratioforrealestateloanswithmaturityupto
5yearshadtobelessthan50%;totalreal
estateloanswerelimitedto25%ofbanks
capital;somewhatweakerstateregulation;
alsoincreaseinrealestatetaxes

Yes:ReichsbankPresidentSchachtaddressed
stockmarketlendingbythreateningto
decreaseorevendenybankaccessto
rediscountfacilities

Yes:Boardapplied"directpressure";no
accesstothediscountwindowforbanks
grantingloansonsecurities;alsodecisionby
Massachusettsregulatorstodenyarequest
forsplittingstockstocounterspeculation

Sources

Alstonetal.(1994),White(2009)

Balderston(1993),Voth(2003)

FriedmanandSchwartz(1963),Kindleberger
andAliber(2011),White(1990)

U.S.stockpricebubble
192829(crisis:Oct.1929)
Yes:Afewmonthsbeforethecrash,
beginninginearly1929;theNewYorkFed
arguedagainstselectivecreditcontroland
votedinfavorofinteresttools,butwas
frequentlyturneddownbytheBoard;
eventuallytheFedwaspermittedto
increasethediscountratefrom5%to6%in
August1929

Event
Time
Place
Overview

"Lostdecade"
Scandinaviancrisis:Norway
Scandinaviancrisis:Finland
19852003(crisis:Jan.1990)
198492(crisis:Oct.1991)
198692(crisis:Sept.1991)
Japan
Norway
Finland
Duringthe1980s,Japanseconomywasspurredby Beginningin1983,Norwayexperiencedaperiodof
Alargeeconomicboomattheendofthe1980s
acceleratinggrowth.Widespreadfinancialderegulation providedthebackdropforarealestateandstock
euphoriaandaneconomicboom,liberalization,
accompaniedbyforeigncapitalinflowscontributedtoa marketbubbleinFinland.Overheatingwasalso
andfinancialinnovation.Whenderegulationof
financialmarketsdeprivedJapanesebanksoflarge lendingboom.Inthisenvironment,abubbleemergedin facilitatedbyalendingboom(especiallyinforeign
currency)andgeneroustaxschemes.Atthesame
customersandincreasedthecompetitivepressure, themarketforrealestate.Increasingcompetitive
theyrapidlyexpandedlending,seekingnew
pressureonbanksledtodeclininglendingstandardsand time,banksandfinancialmarketswerewidely
customers.Thesefactorsincombinationwithlow augmentedrisktaking.Atthattime,NorgesBankpursued deregulatedwithoutintensifyingbanking
monetarypolicytomeetthegovernmentsmainobjective supervision.TheBankofFinlandrecognizedthe
interestratesledtotheemergenceofamassive
adversedevelopments,especiallytheexcessive
assetpricebubbleinstockandpropertymarkets. ofalow,stableinterestrate.Realinterestrateswere
expansionofcredit,anddecidedtotighten
closetozeroorevennegative.However,beginningin
Especiallyfinancialinstitutions,butalso
monetarypolicyslightlyinearly1989.In1991,
households,wereengagedintheseinvestments. 1986,decliningoilprices,highwages,andspeculative
decliningexportstotheSovietUnion,associated
currencyattackschallengedtheeconomy.Fiscalpolicy
Realizingtheunsustainabilityofthese
wastightenedand,forNorgesBank,thedefenseofthe withdecreasingoutputanddevaluationofthe
developments,theBankofJapandecidedto
increaseinterestratesattheendof1989.Even
fixedexchangerateregimebecamethepriority.
markka,andslowingdomesticconsumption
whenequitypriceshadalreadydeclined,theBank Consumptionandinvestmentstartedtodeclinein1987 dampenedtheeconomy.Marketinterestrateswere
furtherraisedthepolicyrateinthesummerof1990 andthebubbledeflated.Thecrisisbeganwiththefailure risingandreducedtheabilityofdebtservicing.
Eventually,theseriousdifficultiesofSkopbank,a
andhelditstableforaboutoneyear.However,the ofseveralsmallerbanksinautumnof1988.Others
sharpreversalinmonetarypolicyprickedthe
followedandasystemicbankingcrisisevolved,reaching commercialbankactingascentralbankforsavings
bubbleandprecipitatedastockmarketcrash.The itspeakin1991.NorgesBankdeliveredliquiditysupport banks,triggeredasystemicbankingcrisis.The
persistentdeclineinassetpricesresultedinalarge onseveraloccasionsandreducedinterestrates
governmentandtheBankofFinlandhadtostepin
proportionofnonperformingloans,causingserious considerably.Moreover,theNorwegiangovernment
toprovideguarantees,takeoverbanks,andprovide
difficultiesforfinancialinstitutions.Theburstingof providedcapitalinjectionsandbankswerenationalized monetaryassistance.Yet,financialdistressspilled
theassetpricebubbleisthereforeassociatedwith throughtheGovernmentBankInsuranceFunds.Norway overtotherealeconomy.Severalhundredsoffirms
failedandoutputdroppedrapidly.Duetointense
whatisreferredtoasJapanslostdecade,a
experiencedasevererecessionandhadtodepegits
speculativepressure,themarkkawaslefttofloatin
protractedperiodofeconomicstagnation.
currencyin1992.
September1992.

Bubbleasset

Stocks,convertiblebonds,realestate

Commercialrealestate,residentialhousing

Land,residentialhousing,stocks

Typeofbubbleasset
Displacement

Securities,realestate
Lendingboomduetofinancialderegulationand
innovation,euphoriaaboutthe"neweconomy"

Realestate
Broadbasedfinancialderegulation

Realestate,securities
Broadbasedfinancialderegulation

Holderofasset

Widelyheld(especiallycorporations,alsobanks)

Firms,households

Firms,households

Event
Time
Financierofasset

"Lostdecade"
19852003(crisis:Jan.1990)
Bankandmortgageloans(banks,finance
companies,governmentfinancialinstitutions)

Scandinaviancrisis:Norway
198492(crisis:Oct.1991)
Credit(domesticandforeignbanks)

Scandinaviancrisis:Finland
198692(crisis:Sept.1991)
Credit(domesticandforeignbanks,finance
companies)

Economicenvironmentduringth
(1)Expansivemonetarypolicy Yes:Interestrateswerereducedfrom5.5%in1982 Yes:Untiltheendofthe1980s,NorgesBankfollowedthe Yes:Constrainedmonetarypolicyduetothefixed
government'sgoalofalowinterestrate.NorgesBankhad exchangerateregime,acceleratinggrowthofthe
to5%in1983,to3.5%atthebeginningof1986,
moneysupply(13.5%in1987,23.6%oneyearlater)
tosellforeignexchangetocounterseveralspeculative
andto2.5%oneyearlater
asaresultofincreasingdemand
attacksonthekrone,butsterilizedthepolicyby
increasingits[OK?]loanstobanks

(2)Lendingboom

Yes:Deregulationoffinancialmarkets,butnot
Yes:Increasingdemandforcredit;"reallendinggrowthat Yes:"Householdsaswellasbusinessesstartedto
borrowasneverbefore"(NybergandVihril,1994,
banks,andfinancialinnovationsincreased
bothcommercialandsavingsbanksincreasedrapidly
p.13);in1988,banklendinggrowthpeakedat30%
competitivepressureonbanksandfueledan
after1982"(Gerdrup,2003,p.22)
expansionofloans,alsoaccompaniedbydeclining
lendingstandards("thereisaconsensusview
amongeconomistsonhowpartialfinancial
deregulationinJapaninthe1980sledtoalending
boom",Posen,2003,p.214)

(3)Foreigncapitalinflows

No:Japanasamajorcreditor

Yes:Capitalinflowsafterrelaxationoffixedexchangerate Yes:"Particularlyforeignborrowingwaswidelyused,
in1984;"thistimeaninflowofforeigncapitalsupported startinginthemid1980s,althoughmorethanhalfof
andreinforcedtheirhighlendinggrowth"(Gerdrup,2003, thisfinancingwasintermediatedbythebanks"
p.22)
(NybergandVihril,1994,p.7)

(4)Generalinflation

No:Inflationremainedlow

Yes:Increasingratesofinflation:1985:5.7%,1986:7.2%, No:Inflationwasdecliningsince1984(8.9%,1985:
5.1%,1986:4.6%),butincreasesince1987(5.3%,
1987:8.7%,and1988:6.7%(Moeetal.,2004,p.32)
1988:6.9%)

Severityofcrisis

Event
Time
(1)Severerecession

"Lostdecade"
19852003(crisis:Jan.1990)
Yes:Veryprotracted,creditcrunch

(2)Bankingcrisis

Yes:Systemicbankingcrisis,largelossesforbanksacross Yes:Rapidincreaseinnonperformingassets;bank
Yes:Highvolumeofnonperformingloansand
lossessoared(reachingapeakofFIM22billionin
failuresofthreelargebanks,butnorunsorlosses allassetclasses
1992);numerousbankscameclosetofailureand
todepositors;"manyfinancialinstitutionswerede
requiredassistance;considerablebanklossesuntil
capitalizedandremainedinbusinessonlybecause
1995
oftheimplicitsupportofthegovernment"
(KindlebergerandAliber,2011,p.115)

(3)Spillovertoothercountries Yes:ImpactonHawaii,Taiwan,andSouthKorea
(closeeconomicrelations)

Policyreactions
(1)Cleaning

Yes:Reductionofthediscountrateto4%until
spring1992andfurther,butstillabove3%atthe
endofthatyearandlaterreducedtoalmostzero;
loanpurchasingprogrambythegovernmentin
1993,capitalinjections,nationalizations,fiscal
stimuluspackage

Scandinaviancrisis:Norway
198492(crisis:Oct.1991)
Yes:Worstrecessionsinceinterwarperiod

Yes:ButstrictlylimitedtoScandinaviancountries

Scandinaviancrisis:Finland
198692(crisis:Sept.1991)
Yes:"Therapiddeclineinoutputthathadbegun
during1989continuedallthrough1991and1992"
(NybergandVihril,1994,p.22);declineoftotal
demandby6.5%andunemploymentrateof11%in
1991;realGDPdroppedby3.5%in1992;800
businessfailuresinOctober1992alone

Yes:ButstrictlylimitedtoScandinaviancountries

Yes: Considerableinterestratereductionsin1993;Norges Yes:Governmentdeclareditwouldsecurefinancial


Bankprovidedliquiditysupport;loansbelowmarket
stabilitybyallmeans;BankofFinlandprovided
liquiditysupport;GovernmentGuaranteeFund,
rates,capitalinjectionsbythegovernment,and
creationofbadbanks,reorganizationofsupervision
nationalizationsthroughGovernmentBankInsurance
Funds

Event
Time
(2)Leaningmonetarypolicy

"Lostdecade"
19852003(crisis:Jan.1990)
Yes:Verylate;afterbeingheldat2.5%untilMay
1989,thediscountratewasincreasedto4%late
thatyear;despiteequitypricedeclines,itwas
increasedfurtherto6%in1990,remainingatthat
leveluntilmid1991

(3)Pricking

Yes:Leaningwasprobablytoostrong;"theBankof No
Japanfinallybegantoraiseinterestratessharplyin
aseriesofsteps,puncturingthebubbles,and
leadingtoeventualeconomicgrowthslowdown,
andthenstagnation"(Patrick,1998,p.12);"the
decision[..]torestricttherateofgrowthofbank
loansforrealestateprickedtheassetpricebubble"
(KindlebergerandAliber,2011,p.285)

No

(4)Macroprudential
instruments

Yes:Quantitativerestrictionsin1990;centralbank No
regulationinstructingbankstorestrictthegrowth
rateoftheirrealestateloans(mustnotexceedthe
growthrateoftheirtotalloans);increaseintaxes
oncapitalgainsfrominvestmentsinland

Yes:Atthebeginningonlystrongstatements;later
inFebruary1988,increaseofspecialreserve
requirementinaccordancewiththebanks(cash
reserverequirementcouldbeincreasedupto12%
[from8%]incaselendingwasnotreduced),but
"somebanksinthesavingsbanksectorchosetopay
thenewpenalratesratherthancurtailtheirrapid
creditexpansion.Furthermore,asmarketswerenow
free,borrowinginforeigncurrenciescontinuedto
increase"(NybergandVihril,1994,p.15)

Sources

HoshiandKashyap(2000,2004),Okinaand
Shiratsuka(2003),KindlebergerandAliber(2011),
Patrick(1998),Posen(2003)

Scandinaviancrisis:Norway
Scandinaviancrisis:Finland
198492(crisis:Oct.1991)
198692(crisis:Sept.1991)
Yes:Inordertodefendthecurrencypeg,thecentralbank Yes:Thedefenseoftheexchangeratepegwasthe
wasforcedtoraisethediscountratedespitedecelerating maintarget;however,restrictiveinterestratepolicy
economicgrowthduetorisinginterestratesinGermany inlate1988andearly1989duetoexcessivecredit
growthandincreasinginflationarypressures

Gerdrup(2003),Moeetal.(2004),Vale(2004)

Bordesetal.(1993),NybergandVihril(1994),
Vihril(1997)

Event
Time
Place
Overview

Asiancrisis:Thailand
199598(crisis:July1997)
Thailand
Thecrisishaditsoriginsinhighgrowthandacredit
boom,spurringbubblesintherealestatesectorandin
thestockmarket.Currentaccountliberalization
entailingcapitalinflowsfromabroadafterthebursting
ofthebubbleinJapan,aswellasfinancialderegulation
andstrongtaxincentivesforforeignborrowing,
contributedtothelendingboom.Whileregulatoryand
correctivemeasuresgenerallylaggedbehindtherapid
growthofbanks,someThaibanksalsocircumvented
regulationsbyfundingnonbankfinancialintermediaries.
ThescopeofmonetarypolicyinThailandwaslimited
duetothepeggedexchangerate.Itremainedrelatively
looseatthebeginningofthe1990s.Inwinterof1996,
theunregulatedfinancecompanysectorsufferedthe
firstlosses,causingmistrustamongforeigninvestors.
WhentheThaieconomywasconfrontedwithincreasing
oilprices,decliningexports,andasuddenreversalof
capitalinflows,confidenceintheregionalbanking
systemcollapsed.Massivespeculativeattacksonthe
Thaibahtforcedthegovernmenttodepegthecurrency
inthesummerof1997.Thecrisisspreadtomostof
SoutheastAsia.Thailandsufferedfromacreditcrunch
andadeepbutshortrecession.Troubledfinancial
institutionsreceivedofficialbackingbythecentralbank.
TheIMFsteppedinandinitiatedstabilizationprograms.

Dotcombubble
19952001(crisis:April2000)
UnitedStates
Thedotcombubblereferstothespeculativestock
marketboomintheUnitedStatesandother
industrializedcountriesattheendofthe1990s
relatedtothefoundingofnewInternetcompanies,
calleddotcoms.Theperiodisassociatedwitha
considerableeconomicboomintheUnitedStates.
AftertheLongTermCapitalManagementcrisisin
1998,theFedeasedmonetarypolicyandalso
providedadditionalliquiditytowardtheendof1999.
Venturecapitalfornewfirmswaswidelyavailable,
whileAmericanhouseholdsinvestedheavilyinnew
technologyshares,alsoencouragedbythemassive
mediaresponsetotheboom.Assetpricessurged.In
hisfamousspeechinDecember1996,formerFed
ChairmanAlanGreenspanwarnedthatirrational
exuberancemighthavecontributedtoovervalued
assetprices.Duringthecourseof1999,theFed
modestlytightenedmonetarypolicytosterilize
formeroperations,butalsobecauseofincreasing
concernsaboutageneralbubbleandinflationary
pressures.Thebubblecollapsedduring1999and
2001.TheNasdaqdropped20%inAprilandMayof
2000and42%fromSeptembertoJanuary.
Nevertheless,realconsequencesweremodest,while
financialmarketscontinuedtofunctionsmoothly.

RealestatebubbleinAustralia
200204(nocrisis)
Australia
TheAustralianbubbleatthebeginningofthe
millenniumiscommonlyknownbecauseofthe
interventionsoftheReserveBankofAustralia.
Thereafter,housingpricesdeclinedsmoothly
withoutsevereconsequences.Previously,financial
marketderegulation,increasingcompetitive
pressuresonbanks,financialinnovationin
securitization,andamorefavorabletaxtreatment
forhousinginvestorshadspurredamassive
increaseinhousingvalues.Banksheavilyexpanded
creditandshiftedtowardhouseholdlending,but
focusedonhighcreditqualityandlowloanto
valueratios.TheReserveBankofAustraliabecame
moreandmoreattentivetopotentialproblems
arisingfromthesedevelopmentsandfirsttriedto
openlycommunicatepotentiallongtermrisks.
Later,ittightenedmonetarypolicyinseveralsteps
beginninginmid2000.However,thestepswere
officiallymotivatedbyinflationarypressuresand
notexplicitlytargetedtoassetprices.Inaddition,
regulatorsandotherofficialbodiesparticipatedin
thediscussionandalsotooksomeactions.Having
modestadverseeffectsonconsumption,the
decelerationofhousingpricesproceededwithout
severedisruptions.

Bubbleasset

Stocks,commercialandresidentialrealestate

Newtechnologycompanystocks

Residentialhousing

Typeofbubbleasset
Displacement

Realestate,securities
Liberalization,capitalinflowsafterimplosionofthe
bubbleinJapan,exportboom

Securities
Technologicalinnovation(Internet,information
technologies),capitalinflowsafterburstofAsian
bubble

Realestate
Financialinnovation(securitization),financial
deregulation

Holderofasset

Professionalhousingdevelopersandindividuals(Renaud Households,retailinvestors
etal.,2001)

Households

Event
Time
Financierofasset

Asiancrisis:Thailand
199598(crisis:July1997)
Credit(financeandsecuritiescompanies,banks)

Dotcombubble
19952001(crisis:April2000)
Toalargeextentequityfinanced

RealestatebubbleinAustralia
200204(nocrisis)
Credit(banks,mortgageoriginators)

Economicenvironmentduringth
(1)Expansivemonetarypolicy Yes: Relativelyloosemonetarypolicy(reducedfrom12% Yes:Reversaloftighteningpolicyof1994,further
Yes:Reductioninseveralstepsfrom6.25%in2000
atthebeginningofthe1990sto9%in1993,helduntil easingin1998duetoconcernsaboutfragile
to4.25%in2001
mid1994),butnoindependentmonetarypolicydueto monetaryarrangementsaftertheLTCMcrisis;toward
peggedexchangerate
theendof1999,abundantliquiditywasprovidedto
preventproblemsrelatedtothetransitiontothenext
millenium

(2)Lendingboom

No:Proceedsfromsecuritiessaleswereusedtobuy Yes:Rapidcreditgrowthandshifttoward
Yes:Banklendinggrowthacceleratedandpeakedat
30.3%in1994;lendingboominThailandwasthelargest moresecurities;"marginlendingforthepurchaseof householdlending
amongtheAsiancountries
equitiesrosesharply,albeittostilllowlevels..."(BIS,
2000,p.5)

(3)Foreigncapitalinflows

Yes:"Thustheexpansionoftheassetpricebubblesin Yes:Capitalinflowsduetoachangeinthetrade
No
balancewithMexicoin1995and1996;alsoinflows
theAsiancapitalsfollowedfromtheimplosionofthe
assetpricebubbleinTokyoandthesurgeintheflowof afterthecollapseofthebubblesinSoutheastAsia,
moneyfromJapan[].TheflowofmoneyfromTokyoto whenthesecountriesrepaidtheirdebt
ThailandandIndonesia..."(KindlebergerandAliber,
2011,p.178),intermediatedbylocalbanks

(4)Generalinflation

No:Moderateandstableinflation(1991:5.70%,1992:
4.07%,1993:3.36%,1994:5.19%,1995:5.69%,1996:
5.85%,and1997:5.61%;Corsettietal.,1999,p.323)

Severityofcrisis

No:"TheU.S.economyboomedinthe1990s.The
inflationratedeclinedfromabove6%atthe
beginningofthe1990stolessthan2%attheendof
the1990s[]"(KindlebergerandAliber,2011,p.181)

No:"...lowandstableinflationenvironment
throughtheearly1990s"(Bloxhametal.,2010,p.
15);19912000:2.2%,2001:4.4%,2002:3.0%,and
2003:2.8%(BIS,2004)

Event
Time
(1)Severerecession

Asiancrisis:Thailand
199598(crisis:July1997)
Yes:Sharprecessionandcreditcrunch,butrelatively
quickrecoveryin1999

(2)Bankingcrisis

Yes:"Theresultswerewidespreadcorporate
No
bankruptcies,collapseintheconfidenceoftheregional
bankingsystem,andfurtherdeclinesofassetprices"
(CollynsandSenhadji,2002,p.12);"losseswere
particularlyheavyinthelargelyunregulatedfinance
companysector"(ibid.,p.12);56financecompanies
failed

(3)Spillovertoothercountries Yes:RegionalturmoilinSoutheastAsiahadglobal
spillovers;economicgrowthworldwideslowed

Policyreactions
(1)Cleaning

Yes:Bailoutsandofficialbackingfortroubledfinancial
institutions,e.g.,centralbank'sFinancialInstitutions
DevelopmentFund(FIDF),IMFsupport

Dotcombubble
19952001(crisis:April2000)
No:"TherecessionthatbeganintheUnitedStatesin
2001wasrelativelymildandbrief"(Kindlebergerand
Aliber,2011,p.85);especiallythenewtechnology
firmswerehithard

Yes:Nasdaqasthemainanchor,thusworldwide
declineoftechnologyindexes

RealestatebubbleinAustralia
200204(nocrisis)
No:In2003"Australiacontinuedtoexpandbriskly"
(BIS,2004,p.13);consumptiondeceleratedin2004
and2005butwasweakerthanexpected;"the
welcomedecelerationinhousepricesseensofar
hashadbenigneffectsrelativetomoredisruptive
potentialscenarios"(BIS,2005,p.66)

No

No

Yes:Sharpdecreaseinthefederalfundsrate,starting No
inearly2001

Event
Time
(2)Leaningmonetarypolicy

Asiancrisis:Thailand
Dotcombubble
199598(crisis:July1997)
19952001(crisis:April2000)
Yes:Morerestrictivemonetarypolicysince1994,dueto Yes:Butrelativelylateandwithanotherfocus;the
currencydepreciationinducedbyloosemonetarypolicy; dotcombubbleitselfwasnotaconcern;officially
morerestrictive(0.5increaseto9.5%inSeptember1994 Greenspan(2002)emphasizedtheintentionto"focus
and10.5%inMarch1995),butineffectiveduetocapital onpoliciestomitigatethefalloutwhenitoccursand,
inflows
hopefully,easethetransitiontothenextexpansion";
modestincreaseininterestratesfrommid1999to
May2000,by150basispoints,inordertoreverse
previousratecutsandowingtoconcernabout
generalbubbleinequitymarketsandinflationary
pressures

RealestatebubbleinAustralia
200204(nocrisis)
Yes:Timely;motivatedbyinflationarypressures,
butalsobyrisesinhousepricesandhousehold
borrowing;increaseininterestratesin2002by0.5
basispoint,in2003:nocutratesthroughtheyear
(incontrasttoallotherdevelopedcountries);
increaseofthecashrateby0.25inNovemberand
Decemberto5.25%,"closetolevelsseenas
consistentwithlongrunnoninflationary
sustainablegrowth"(BIS,2005,p.65)butalso
justifiedbythedesiretocontainthedevelopments
inthehousingsector(ibid.,p.66)

(3)Pricking

No

Yes:"Thelate1990sbubbleinU.S.stockpriceswas
prickedbytheFederalReservein2000whenit
soughttowithdrawsomeoftheliquiditythatithad
providedinanticipationoftheY2Kproblem"
(KindlebergerandAliber,2011,p.102)

No

(4)Macroprudential
instruments

Yes:Inmid1996,thecentralbankobligedbanksand
financecompaniestoholdhighercashreserve
requirementsforshorttermdepositsownedby
foreigners

No

Yes:"Openmouthpolicy"(Bloxhametal.,2010)to
raisepublicawareness:clearcommunication,
centralbankwastelegraphingtheirintention,
clarificationofpolicygoalsresultedinverbal
tightening(forwardlookingbehaviorofprivate
sectorduetochangeinexpectations)(BIS,2004,p.
75);highercapitalrequirementsfornonstandard
loans(e.g.,homeequityloans)andlenders'
mortgageinsurersafterstresstest;securitiesand
competitionregulators(ASICandACCC)reinforced
investigationofillegalactivitiesbyproperty
marketers

Sources

BankofThailand,CollynsandSenhadji(2002),Corsetti
etal.(1999),Lauridsen(1998),Renaudetal.(2001)

BISAnnualReport(2000,2001),Greenspan(2002), BISAnnualReport(2003,2004,2005,2006),
Cochrane(2003),KindlebergerandAliber(2011),
Bloxhametal.(2010),RBAAnnualReport(2003)
OfekandRichardson(2008)

Event
Time
Place
Overview

Subprimehousingbubble
Spanishhousingbubble
200310(crisis:2007)
1997?(crisis:2007)
UnitedStates
Spain
TherecentU.S.housingbubbleisassociated
TheSpanisheconomyreliedheavilyondomestic
withthemostseverefinancialcrisissincethe
demandandtherealestatesectorsincethemid
GreatDepression.Whatbeganasdistressinthe 1990s.Lowinterestratesintheeurozone,increasing
competitionamongbanks,populationgrowth,
U.S.subprimesectordevelopedintoaglobal
foreignhousepurchases,andabooming
financialcrisis.Intheearly2000s,financial
constructionsectorfurtherfueledthehousing
deregulationandinnovationincluding
securitizationandnewfinancialinstruments,
bubble.ItburstwhentheU.S.subprimecrisisspread
accompaniedbytherapidgrowthoftheshadow toEurope.Spanishbankswerehitveryhardbythe
bankingsector,contributedtoacreditboomin spilloversastheywerestronglyengagedinfinancing
thehousingsector.Soaringhousingvaluesand constructionandpropertydevelopmentactivities.
optimisticexpectationsspurredtherealestate Whilethedirectexposuretosubprimelosseswas
limited,changingexpectationsregardingthe
bubble.However,withthedecelerating
developmentofhousingprices,aswellasthecredit
economyandrisinginterestrates,price
crunchintheinterbankmarketandthewholesale
increasesslowedin2005andreversedinmid
2006.Deliquencyratesincreasedandthevalues marketformortgagefinancingproducts(onwhich
ofmortgagebackedsecuritiesandother
Spanishinstitutionsreliedheavily),hadagreat
structuredproductsdropped.Whileuncertainty impact.Thecrisishaddramaticeffectsonthereal
spread,severedistressforfinancialinstitutions economy,leadingthegovernmenttoreorganizethe
bankingsectorin2010andtostrengthenprudential
inandbeyondtheshadowbankingsector
emerged.Thecrisisenteredanewphasewhen regulation.Bankbailouts,decreasingtaxrevenues
fromtheconstructionsector,theseverityofthe
theU.S.governmentlettheinvestmentbank
LehmanBrothersfailinSeptember2008.
recession,andfailingconfidenceintheeurozone
Concernsaboutthesoundnessofthefinancial causedthefiscalsituationtodeterioratemarkedly.
systembecameparamount,severelyreducing Asaconsequence,sovereignbondspreadsroseand
lendingtotherealeconomyandintheinterbank asovereigndebtcrisisevolved.SpainappliedforEU
rescuefinancingundertheEuropeanFinancial
market.Thecrisisspreadtodifferentmarkets
StabilityFacility(EFSF)onJune25,2012andleftthe
andaroundtheglobe.
EuropeanStabilityMechanism(ESM,theEFSFs
successorinstitution)programafter18monthsin
January2014.

Bubbleasset

Subprimemortgages,securitizedassets

Residentialhousing

Typeofbubbleasset
Displacement

Realestate
Financialinnovation(securitization),financial
deregulation,savingsglut

Realestate
SpilloverfromtheU.S.

Holderofasset

Widelyheld

Widelyheld

Event
Time
Financierofasset

Subprimehousingbubble
200310(crisis:2007)
Credit(banks,shadowbanks),international
investors(especiallybanks)

Spanishhousingbubble
1997?(crisis:2007)
Credit(banks,especiallycajas)

Economicenvironmentduringth
(1)Expansivemonetarypolicy Yes: LaxpolicybytheFed;1%keyratefrommid Yes:TheECB'sinterestratewastoolowforthe
2003tomid2004,whenhousepricesincreased Spanishsituation(GarciaHerreroanddeLis,2008);
significantly
referencerateforhousingloansdecreasedfrom
9.6%in1997to3.3%in2007

(2)Lendingboom

Yes:"Thiscombinationofcheapcreditandlow
lendingstandardsresultedinthehousingfrenzy
thatlaidthefoundationsforthecrisis"
(Brunnermeier,2009,p.82)

Yes:Creditexpansion;"thehousingboomwas
reflectedinacreditboom,withratesofgrowththat
peakedabove25%in2006"(GarciaHerreroandde
Lis,2008,p.3);loanstotheconstructionand
housingsectoramountedtoapproximately45%of
GDPin2007

(3)Foreigncapitalinflows

Yes:"U.S.economywasexperiencingalow
interestrateenvironment,bothbecauseoflarge
capitalinflowsfromabroad,especiallyfrom
Asiancountries,andbecausetheFederal
Reservehadadoptedalaxinterestratepolicy"
(Brunnermeier,2009,p.77)

Yes:"...thepurchaseofsecondaryhomesbyother
EUcountriescitizens,especiallyinthe
Mediterraneancoast(netforeigninvestmentin
housingrangedbetween0.5%and1%ofSpanish
GDPforeachyearbetween1999and2007)"(Garcia
HerreroanddeLis,2008,p.3)

(4)Generalinflation

No:"...quiescenceofunderlyinginflation"(BIS, Yes:HigherinflationinSpaincomparedtoeurozone:
2006,p.60);19912003:2.7%,2004:2.7%,2005: 19932003:3.3%,2004:3.1%,2005:3.4%,and2006:
3.6%(eurozone:19912003:2.4%,2004:2.1%,2005:
3.4%,and2006:3.2%(BIS,2006,p.11)
2.2%,and2006:2.1%)(ECB)

Severityofcrisis

Event
Time
(1)Severerecession

Subprimehousingbubble
200310(crisis:2007)
Yes:WorstrecessionsinceGreatDepression

Spanishhousingbubble
1997?(crisis:2007)
Yes:Sharprecession;GDPfell6.3%inthefirst
quarterof2009;ashortperiodofpositivegrowth
camein2011;negativeratessincethen,aswellas
severeunemployment(rosefrom8.3%in2007to
20.1%in2010);creditcrunch

(2)Bankingcrisis

Yes:Runs,liquidityhoarding,andmassive
failures;alsofiresalesandmargincalls

Yes:Banksinhighlyprecariousposition:highrisk
concentration,refinancingproblems,assetvalue
lossesamountedto9%ofGDP,failuresandrescues

(3)Spillovertoothercountries Yes:Globalfinancialcrisis

Policyreactions
(1)Cleaning

Yes:Bailouts,liquidityfacilities,reductionof
interestratestoalmostzero,recapitalization,
TARP,unconventionalmonetarypolicy(e.g.,
quantitativeeasing,extensionofcollateral
eligibility),EconomicStimulusAct

Yes:Afterthebubbleburst,theeconomywentinto
recession;taxrevenuescollapsedanddeficits
soared;Spainenteredthisrecessionatratherlow
levelsofgovernmentdebt,butdomesticbanks
reliedheavilyonfinancefromabroad;inwhat
followed,Spainbecameamajorsourceofspillovers
tootherEuropeancountriesgovernmentbond
markets(cf.ClaeysandVaek,2012)

Yes:Bailoutsandnationalization,fiscal
consolidation,andreorganizationofthebanking
sector:FundforOrderlyBankRestructuring(FROB),
measurestorestoreconfidence(stresstests,
transparencyetc.),equity,etc.

Event
Time
(2)Leaningmonetarypolicy

Subprimehousingbubble
200310(crisis:2007)
Yes:Butnotintentional;accordingtoFed
ChairmanBernanke,regulatorypolicyandnot
centralbankshoulddealwithbubble;however,
theFedraisedtheinterestratefrom1%inJune
2004in17stepsupto5.25%inJune2006

(3)Pricking

No:AftertheFedhadraisedinterestrates,
No
mortgageratescontinuedtodeclineonemore
year;however,increasingmortgagerateslater
inducedrefinancingproblemsforhomeowners,
anddeliquenciesincreased

(4)Macroprudential
instruments

No:Butsomeeffortsweremadetoaddresspoor Yes:Tighteningofprudentialregulation(regulatory
underwritingstandardsbydevelopingguidance capitalandloanlossprovisioningrequirementsfor
realestateexposures);dynamicprovisioning
fornontraditionalmortgageproductsin
cooperationwithotherregulators
introducedinthirdquarterof2000,modificationat
thebeginningof2005;suddenloweringofthefloor
ofthedynamicprovisionfundsinlate2008from
33%to10%;countercyclicalcapitalbufferswith
positiverealeffects

Sources

Brunnermeier(2009),FCIC(2011),Gortonand
Metrick(2012),ReinhartandRogoff(2009),
Shiller(2008)

Spanishhousingbubble
1997?(crisis:2007)
Yes:Leaningtimelyenough,butalooseningof
provisionrequirementsoccurredinQ1:2005:"anet
modestlooseninginprovisioningrequirementsfor
mostbanks(i.e.,atighteningoftheprovision
requirementsoffsetbyaloweringoftheceilingof
thedynamicprovisionfund)"(Jimnezetal.,2012,
p.4);magnitudeofshockfurthercurtailed
effectiveness

CarballoCruz(2011),ClaeysandVaek(2012),
GarciaHerreroanddeLis(2008),Jimnezetal.
(2012),Mller(2011)