NEW YORK (MNI) – The following is the sixth of seven sections
of Federal Reserve Chairman Ben Bernanke’s remarks titled “Rethinking
Finance: Perspectives on the Crisis” prepared for the Russell Sage
Foundation and The Century Foundation:

—

Footnotes;

1 See Ben S. Bernanke (2010), “Causes of the Recent Financial and
Economic Crisis,” statement before the Financial Crisis Inquiry
Commission, Washington, September 2,
www.federalreserve.gov/newsevents/testimony/bernanke20100902a.htm.

2 According to the Federal Reserve’s statistical release “Flow of
Funds Accounts of the United States,” the value of real estate held by
households fell from $22.7 trillion in the first quarter of 2006 to
$20.9 trillion in the fourth quarter of 2007 (down 8.1 percent from the
first quarter of 2006). It then declined to $18.5 trillion in the third
quarter of 2008 (down 18.6 percent from the first quarter of 2006) and
to $16.0 trillion in the fourth quarter of 2011 (down 29.7 percent from
the first quarter of 2006). The stock market wealth of U.S. households
peaked at $18.1 trillion in the first quarter of 2000 and fell $6.2
trillion to $11.9 trillion through the third quarter of 2001. After a
short-lived recovery, stock market wealth bottomed at $9.9 trillion in
the third quarter of 2002. Overall, stock market wealth fell $8.3
trillion (or 46 percent) between its peak in the first quarter of 2000
and its trough in the third quarter of 2002. The flow of funds accounts
are published quarterly and are available at
www.federalreserve.gov/releases/z1.

3 See Walter Bagehot ([1873] 1897), Lombard Street: A Description
of the Money Market (New York: Charles Scribner’s Sons). The classic
theoretical analysis of “pure” banking panics is in Douglas W. Diamond
and Philip H. Dybvig (1983), “Bank Runs, Deposit Insurance, and
Liquidity,” Journal of Political Economy, vol. 91 (3), pp. 401-19). Note
that the term “panic” does not necessarily imply irrational behavior on
the part of depositors or investors; it is perfectly rational to
participate in a run if one fears that the bank will be forced to close.
However, the collective action of many depositors or investors can lead
to outcomes that are undesirable from the point of view of the economy
as a whole.

4 For further discussion, see Ben S. Bernanke (2009), “Reflections
on a Year of Crisis,” speech delivered at “Financial Stability and
Macroeconomic Policy,” a symposium sponsored by the Federal Reserve Bank
of Kansas City, held in Jackson Hole, Wyo., August 20-22,
www.federalreserve.gov/newsevents/speech/bernanke20090821a.htm.

5 For a theoretical discussion of “margin spirals” and related
phenomena, see Markus K. Brunnermeier and Lasse Heje Pedersen (2009),
“Market Liquidity and Funding Liquidity,” Review of Financial Studies,
vol. 22 (6), pp. 2201-38. Institutional details on the triparty repo
market and a description of developments in that market during the
crisis are provided in Adam Copeland, Antoine Martin, and Michael Walker
(2010), “The Tri-Party Repo Market before the 2010 Reforms,” Federal
Reserve Bank of New York Staff Reports 477 (New York: Federal Reserve
Bank of New York, November),
www.copeland.marginalq.com/res_doc/sr477.pdf. The role of the “run on
repo” in the crisis is discussed in Gary B. Gorton and Andrew Metrick
(2009), “Securitized Banking and the Run on Repo,” NBER Working Paper
Series 15223 (Cambridge, Mass.: National Bureau of Economic Research,
August), www.nber.org/papers/w15223.

-more- (6 of 7)

** MNI New York Newsroom: 212-669-6430 **

[TOPICS: MK$$$$,M$U$$$,MMUFE$,MGU$$$,MFU$$$]