Wednesday, September 23, 2009
Tuesday, September 22, 2009
Insurance Against Financial Fear
When the economy stumbles, panic can drive matters from bad to worse. Economist Ricardo Caballero has a new plan to keep investment markets free of fear.
Just one year ago, a worldwide panic was unfolding: Financial markets froze after the collapse of the investment bank Lehman Brothers, leaving businesses without lenders as the economy drastically slowed.
How can we stave off such fear-enhanced episodes in the future? Ricardo Caballero, MIT's Ford International Professor of Economics, offers a distinctive solution: Government-issued investment insurance for banks.
"A crisis is a mixture of real problems and a panic component, which at the worst moment of a crisis can be larger than the underlying problems," says Caballero, who presented the plan at the Federal Reserve's high-profile Annual Economic Symposium in Jackson Hole, Wyo., in late August. "The proposal is a sort of financial defibrilator, to be ready in case it is needed."
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