Unprecedented Actions during Financial Crises
Frederic Mishkin and Eugene White have a very interesting Federal Reserve Bank of Dallas working paper which looks at the Federal Reserve's response to the global financial crisis in the light of history. They argue that the "unprecedented actions" of the Fed during the global financial crisis were not that unprecedented as they all had precursors in the history of central banking. They draw on the central banking histories of the UK, US and France and suggest that "unprecedented actions" have been a part of a central bank's arsenal since the nineteenth century. Indeed, they argue that the failure of the Fed to take "unprecedented actions" in the 1930s contributed to the severity of the Great Depression.
I have several issues with this paper. First, some of the seven "unprecedented actions" of 2008-9 do not have direct historical parallels (see chapter 6 of my book Banking in Crisis). Second, although all seven actions happened simultaneously in 2008-9 (throwing the proverbial kitchen sink at the problem), they were never all implemented simultaneously in the historical experience. Third, "unprecedented actions" create moral hazard, a point which Mishkin and White acknowledge, but somewhat downplay by stating that it was only more recent interventions (e.g., Continental Illinois in 1984 and LTCM in 1998) which created moral hazard, rather than a build up of moral hazard reaching back to the early twentieth century as I argue in Banking in Crisis.