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The Transmission of the Financial Crisis in 1907: An Empirical Investigation Jon Moen, Mississippi, and Ellis Tallman, Oberlin 1 Similarities Between 1907 and 2008 Heinze national banks => Bear Stearns: aided by LOLR. Trust Companies

  1. The Transmission of the Financial Crisis in 1907: An Empirical Investigation Jon Moen, Mississippi, and Ellis Tallman, Oberlin 1

  2. Similarities Between 1907 and 2008  Heinze national banks => Bear Stearns: aided by LOLR.  Trust Companies => Investment Banks: outside traditional LOLR arrangements.  Knickerbocker => Lehman Brothers: both received no aid. 2

  3. When Did the Panic Spill over to other Markets?  Crisis at the Heinze National Banks—  No panic (but rumblings)  National Bank of Commerce Announcement on Oct. 21.  Knickerbocker Run.  Call loan rate spikes 3

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  5. So Far Panic Confined to New York  Knickerbocker trust suspends on Tuesday, October 22.  Runs on deposits spread to other New York Trusts  Trust Company of America, for example, October 23.  Credit Tightens on the Stock Market, October 24.  Money pools formed by JP Morgan.  Call rate remains around 50%. 5

  6. Suspension and Loan Certificates  On October 26 The New York Clearing House Acts.  Authorizes issuance of clearing house loan certificates.  Announces suspension of convertibility of deposits.  Call rate falls, but not back to normal yet.  Unusual in that unlike in earlier panics, both actions are taken at the same time. 6

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  11. Currency Premium and Gold Flows  The announcement of suspension raised the premium on cash over deposits in New York.  Spurs gold imports according to Muhleman and Cannon, although Sprague (1910) and Wicker (2000) disagree.  Spread panic overseas through exchange rates, outflows of gold to the US. 11

  12. Stock and Bond Markets  No immediately obvious reason why panic should have spread beyond the trusts.  Stock market had been in a long decline throughout 1907.  “Rich Men’s Panic” in March.  Bank of England, Earthquakes in 1906 had tightened credit.  Correlation between stock and bond returns increases in mid-November. 12

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  14. How 1907 Changed the Present  More Aware of Intermediaries Removed from the Usual Sources of Liquidity.  Role of different types of intermediaries operating in the same financial market. 14

  15. How the Present Has Changed 1907  Focusing on dramatic runs on deposits can be misleading.  Disruptions to short-term lending important.  Unintended links between financial markets.  Alignment of private and collective interests. 15

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