The past mirror: notes, surveys, debates

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

William A. Allen^a1 and Richhild Moessner^a2

^a1 Cass Business School, bill@allen-economics.com

^a2 Bank for International Settlements and Cass Business School, richhild.moessner@bis.org

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.

(Received October 01 2011)

(Revised April 24 2012)

(Accepted May 11 2012)

(Online publication July 06 2012)

Keywords

• financial crisis;
• liquidity;
• international monetary system;
• Great Depression

JEL classification

• E58;
• F31;
• N1

Footnotes

¹ The views expressed in this article are those of the authors and not necessarily the views of the BIS. We would like to thank Robert Aliber, Jacob Gyntelberg, Harold James, Zoltan Pozsar, Catherine Schenk, Philip Turner, a very helpful though anonymous referee, and seminar participants at the Bank for International Settlements, Cass Business School, the Federal Reserve Board, the IMF, the London School of Economics Financial Markets Group and the Swiss Society of Economics and Statistics annual meeting for helpful comments and discussions. An earlier version of this article has been published as BIS Working Paper no. 348.