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The joint production of confidence: lessons from nineteenth-century US commercial banks for twenty-first-century Euro area governments1

Published online by Cambridge University Press:  11 October 2011

Adalbert Winkler
Adalbert Winkler
Affiliation:
Frankfurt School of Finance and Management, a.winkler@fs.de
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Abstract

This article argues that the crisis in euro area government bond markets reflects the same kind of stability challenges financial intermediaries face when confronted with a negative macroeconomic shock without having access to a lender of last resort. Nineteenth-century US banks operated under such a framework and used clearing houses in times of crisis as a co-insurance mechanism against contagious runs. Their experience provides valuable lessons for the ongoing reform efforts in the euro area. The analysis reveals that most of the instruments clearing houses used in the joint production of confidence are similar to the ones euro area governments have recently decided upon, such as the establishment of the European Financial Stability Facility. This suggests that the euro area crisis response has followed best private-sector practices of crisis management. However, inherent fragilities of co-insurance mechanisms as well as the long maturity and elusive quality of government debt present a challenge in designing a sustainable solution to the crisis without compromising on the original goal of euro area governance: ensuring sound fiscal policies as a prerequisite for maintaining price stability. To meet this challenge a substantially more comprehensive economic and political union might be needed.

Keywords

euro area governanceclearing housesfinancial crisisgovernment debt

JEL classification

H63: Debt • Debt Management • Sovereign Debt G21: Banks • Depository Institutions • Micro Finance Institutions • Mortgages E58: Central Banks and Their Policies N21: U.S. • Canada: Pre-1913
Type
The past mirror: notes, surveys, debates
Information
Financial History Review , Volume 18 , Issue 3 , December 2011 , pp. 249 - 276
Copyright
Copyright © European Association for Banking and Financial History e.V. 2011

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