Banking crises can be divided into those involving merely one bank or the banking system as a whole. Banks may be either short of liquidity or insolvent. A solvency crisis in the banking system as a whole is by far the most serious and the hardest to solve. These only occur when there has been a widespread fall in asset prices, which only happens after a financial bubble has burst.
Sooner or later, another very serious banking crisis will inevitably occur if no action is taken to stop financial bubbles inflating. The authorities are at present looking in the wrong direction. Attention should be focused on understanding how financial bubbles inflate - they are monetary phenomena - and how to stop this from happening. They need to understand that despite an ever growing book of regulation and ever increasing number of regulators, they have spectacularly failed in preventing at least 2 bubbles in a decade – that is the dot com bubble and the present credit crunch.
Bashing bankers for the slack that they were given by regulators and politicians isn’t going to prevent bubbles from reoccurring, What is needed is stricter regulation on products that prevent easy credit, and tighter control of monetary policy to ensure that there is not too much money sloshing around in the economy which then finds its way into the ‘next big thing’.
Chirag Shah
Director
