STOCK MARKET WATCH -- Thursday, 19 January 2012

[AnneD]

76. Banking Holidays and Panics.....

I came across this academic economic history piece that I thought I would share. A bit dry but that can be part of it's charm-no hype or attempts to sell you a product......

http://eh.net/encyclopedia/article/wicker.banking.panics.us

Prior to the passage of deposit insurance legislation in 1933 banking panics were a recurrent feature of U.S. banking history. Three phases of that panic experience can be identified depending upon the type of regulatory framework in place: the pre-Civil War era, the National Banking era, and the era of the Federal Reserve System. Federal regulation was absent in the antebellum period with panics in 1819, 1837, 1857 and incipient panics in 1860 and 1861. During the National Banking era, banking panics occurred in 1873, 1893, and 1907 with incipient panics in 1884 and 1890. After the Federal Reserve Act was passed in 1913, there were four full-scale banking panics, one in 1930, two in 1931, one in 1933 and a localized panic in Chicago in 1932. This article will examine post-Civil War banking panics only.

Panics as Financial Shocks
Banking panics belong to a general class of financial shocks, which include panics in the stock market, the foreign exchange market and the acceleration of commercial bankruptcies. Banking panics are only one type of financial shock and certainly not the most frequent.

A banking panic may be defined as a class of financial shocks whose origin can be found in any sudden and unanticipated revision of expectations of deposit loss where there is an attempt, usually unsuccessful, to convert checking deposits into currency. In the past banking panics were regarded as examples of irrational or inscrutable behavior. That has changed. More recently they have been treated as a rational depositor response to an asymmetric information deficit. This revival of interest in banking panic theory has renewed scholarly interest in what happened in specific panic episodes.

<big snip>
Disappearance of Panics after 1933
The long era of banking disturbances finally ended in 1933 due partly to the introduction of deposit insurance, improved performance of the Federal Reserve, and a better understanding of the sources of systemic banking unrest. Knowledge alone, we have learned, is not a sufficient guarantee to forestall banking panics. Leadership and policymaker competence are important as well.

The last paragraph is my fav and demonstrates why I think we are at risk.