Taylor on Lehman together with TARP

John Taylor took the problem to reply to here.)  The thought that I or John Taylor don't shout out back at that spot was a run is fifty-fifty to a greater extent than preposterous.  (One of many examples here , p. 7: "Why was at that spot such a large autumn inward output? For in 1 lawsuit inward macroeconomics nosotros genuinely take away keep a expert thought what  the stupor was—there was a ‘‘run’’ inward the shadow banking system.")

To altitude it off , Krugman writes "Anyone else take away keep the impression that something happened inward the minute one-half of September 2008?" I hateful genuinely , accusing Taylor together with myself of thinking that nothing happened inward September 2008? Are Krugman's readers such simpletons that they autumn for such unvarnished falsehoods?

Taylor did us a service past times taking the fourth dimension to straighten this 1 out.

Yes at that spot was a run.

Taylor's detailed move shows what many of us sensed: That the run was non triggered past times Lehman's bankruptcy. Instead a expert purpose of the run tin live set at the feet of Treasury Secretary Paulson , who showed upward on national TV bespeak for 700 billion dollars , alongside 3 sheets of newspaper inward front end of him , no clear explanation of what he wanted to create alongside the coin , together with alongside a hastily-imposed short-sale ban on banking concern stocks. How to Cause H5N1 Run 101.

More importantly , Taylor's move also puts to residue Krugman's thought (last sentence) that Lehman caused or threatened a chain of bankruptcies. Ed Lazear puts it nicely: it wasn't dominoes , it was popcorn.

That's what a run is. When a slice of intelligence comes out that banks may live inward problem ,  people push clitoris their coin out of all the banks at the same time.  Krugman is existence only incoherent inward starting fourth dimension calling it a run together with and thence a threatened chain of bankruptcies exclusively saved past times farther bailouts.

In fact , the run is primal to my persuasion of the crisis together with its lessons. I dubiety Krugman has thought through the implications carefully , along alongside the distinction betwixt dominoes together with popcorn , every bit they run direct counter to his worldview.

Runs don't take away keep a unmarried movement , they take away keep a straw that broke the camel's back. Ask yourself , would only bailing out Lehman take away keep avoided this whole mess? Obviously not.  People saw Lehman learn nether -- together with Paulson's speech communication , addition short-sale ban , addition everything else going on at the fourth dimension -- together with asked themselves , "gee , my banking concern was investing inward the same things Lehman was. I wonder how they're doing? I'd meliorate push clitoris my coin out just to live safe."   ("People" hither way institutional investors inward the shadow-banking organization , i.e. prime-brokerage customers , repo investors , derivatives counterparties , asset-backed safety investors.)

In the circumstances of Fall 2008 , suppose that the authorities had announced a large Lehman bailout , particularly along alongside Paulson's speech. Well , y'all come upward to just nearly the same worries nearly your ain banking concern , every bit if Lehman had non been rescued , don't you? If they had to rescue Lehman , they must take away keep been inward existent trouble. I wonder if my banking concern is inward similar trouble?

Actually it would take away keep been worse. such a bailout would take away keep also come upward alongside a howl of protestation , together with it was clear that the bailouts would take away keep to goal somewhere , together with the side past times side 1 would live bigger.  AIG? Citigroup? Hmm , let's take away keep our coin out extra special fast every bit a large blowup is coming this way.

The insight that it was a run is primal to my persuasion of  how to create things. If it was a run , echoing , every bit Krugman says , Friedman together with Schwartz's persuasion of the Great Depression , together with thence or thence of Friedman together with Schwartz's conclusions are sure enough warranted! No , this was non or thence mysterious failure of  capitalism together with nosotros demand to take away keep the Fed run everything nether Dodd-Frank. No , this does non require that nosotros relieve every large institution together with protect them from contest together with failure forever. This was 1 run really similar the many runs together with panics we've seen throughout history.

Our run was inward the shadow-banking system. I recommend Darrel Duffie's "Failure mechanics of dealer banks ," the article  together with the book  Once y'all read these , y'all naturally come across uncomplicated ways inward which nosotros tin create bankruptcy constabulary together with run-prone assets inward house of Dodd-Frank. How , exactly? That's a dependent area for or thence other post service -- genuinely a long serial -- coming up.

Yes it was a run. And that fact leads direct to or thence really un-Krugmanlike conclusions.

(If y'all desire to read what I genuinely take away keep written thence far nearly this consequence it's all here. I'm teaching a shape this calendar week on fiscal crisis -- we're going to pass a lot of fourth dimension on Duffie together with Gary Gorton's analysis of the run inward repo markets.)