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The international propagation of the financial crisis of 2008 and a comparison with 19311

Published online by Cambridge University Press:  06 July 2012

William A. Allen  and
Richhild Moessner
William A. Allen
Affiliation:
Cass Business School, bill@allen-economics.com
Richhild Moessner
Affiliation:
Bank for International Settlements and Cass Business School, richhild.moessner@bis.org
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Abstract

We examine the international propagation of the financial crisis of 2008, and compare it with that of the crisis of 1931. Both crises featured a flight to liquidity and safety. We argue that the collateral squeeze in the United States, which became intense after the failure of Lehman Brothers, was an important propagator in 2008; in 1931 the acceptances granted by London banks to central European borrowers propagated the crisis to the UK. In both crises, central banks' reserve management actions contributed to the liquidity crisis. And in both crises, the behaviour of creditors towards debtors, and the valuation of assets by creditors, were very important. However, there was a key difference between the two crises in the range and nature of assets that were regarded as liquid and safe: central banks in 2008, with no gold standard constraint, could liquefy illiquid assets on a much greater scale.

Keywords

financial crisisliquidityinternational monetary systemGreat Depression

JEL classification

N1: Macroeconomics and Monetary Economics • Industrial Structure • Growth • Fluctuations F31: Foreign Exchange E58: Central Banks and Their Policies
Type
The past mirror: notes, surveys, debates
Information
Financial History Review , Volume 19 , Issue 2 , August 2012 , pp. 123 - 147
Copyright
Copyright © European Association for Banking and Financial History e.V. 2012

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