Richebacher's bleak scenario

Brad De Long delong at econ.Berkeley.EDU
Tue Nov 2 08:29:55 PST 1999

>Peter Kilander wrote:
> >
> >
> > You may be right. If I was conspiracy minded (and I am thanks to too much
> > bad television and film) I'd suggest that Greenspan pushed the White House
> > to get a deal on the repeal of Glass-Steagall which will enable the
> > megamergering of financial institutions prior to the big POP.
>These monsters
> > will be TBTF (too big to fail) thereby simplifying the
>government's clean-up
> > job. (Plus, former Treasury Secretary Robert Rubin is now one of the three
> > heads heading Citigroup. Coincidence? I think not.)
>Could be. On the other hand, it appears that the bubblemeisters have already
>made it clear that no large bank will be allowed to fail, with or without
>megamergers. In fact, the threshold for TBTF and socialization of
>risk has been
>relentlessly lowered during the last 10 years. First, the S&L - no question
>about it, their failure would probably have destroyed the financial system.
>Then, Mexico - a big deal, no doubt, but Mexico had already defaulted in 1982
>and the US financial system withstood the blow.

As Stanley Fischer never tires of saying, the primary point of the peso support package was to help *Mexico.* After 1982 it took roughly seven years before the claims resulting from default were untangled and Mexican economic growth resumed. After 1995 it took only one year. That seems to me (and seems to Fischer) to be a considerable improvement...

Brad DeLong

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