Financial panics subside, and the authorities realize a profit on their intervention. But not this time, because the financial problems were combined with a process of political disintegration.

There is a trade off between competition and stability. Indeed, greater competitive pressure may increase the fragility of banks balance sheets and make investors more prone to panics.

In the past, the counter cyclical behavior of large private institutions stabilized market expectations during panics. The house of Rothschild made the first half of the nineteenth century stable.

The Limits to Growth warned humanity in 1972 that devastating collapse was just around the corner. But, while we have seen financial panics since then, there have been no real shortages or productive breakdowns.

Otherwise, bank runs and debt panics will be rampant. Obstfeld had in mind a bailout mechanism for banks, but it is now abundantly clear that one also needs a lender of last resort and a bankruptcy mechanism for states and municipalities.

The United States had emerged from the war as the world s largest creditor, but it had a double vulnerability. Its financial system was unstable and prone to panics, and its political system was immature and prone to populism and nativism.

To make matters even worse, emerging markets are deprived of the one tool that the advanced countries have employed in order to stem their own financial panics domestic fiscal resources or domestic liquidity. Emerging markets need foreign currency and, therefore, external support.

In those panics, financial innovation caused uncertainty and nervousness, but also induced an important and beneficial learning process. The financial institutions that survived the crises went on to play a crucial role in pushing further development, and they had enhanced reputations because they withstood a crisis.

UK political leaders and many European governments are strongly urging the Scots to vote against independence. Scottish independence, the No campaign argues, would bring few if any of the claimed benefits on the contrary, it would cause many economic calamities, ranging from financial panics to the flight of jobs and industry from Scotland.

Their reserves have become so large that even the announcement of a small shift in assets say, from euros to dollars can move markets and cause disruptions and panics. Like past reserve regimes that offered a choice of assets (for example, the dollar, the pound, and gold in the interwar period), instability is inherent.

Major European banks in the United Kingdom, Germany, and France have, like their 1980 s predecessors, built up a gigantic exposure to what they erroneously thought was safe debt. A substantial immediate haircut on the sovereign debt of the vulnerable eurozone countries would be so destructive that it would set off a new round of bank panics.

Shorting a stock is difficult and risky it is difficult because borrowing stocks is hard to do, and it is risky because shorting has limited upside but infinite downside. In other words, the traditional securities available to investors make it easier to bet in favor of a company than against it, causing prices to be affected more by irrational exuberance than by panics.

Domestic monetary policy has become the first and last line of defense against growth slowdowns and financial panics, enabling policymakers to avoid pursuing other important, but far more difficult measures. Using monetary policy to compensate for deficiencies in other policy areas constitutes an institutional breakdown monetary policymakers are not necessarily getting it wrong, but they are constrained by the configuration of other policies.