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Vol 21 No 11 Nov/Dec 2016

Book of the Month

Cover of Criminal Injuries Compensation Claims

Criminal Injuries Compensation Claims

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Connectedness and Contagion: Protecting the Financial System from Panics


ISBN13: 9780262034371
Published: June 2016
Publisher: MIT Press
Country of Publication: USA
Format: Hardback
Price: £28.95



Despatched in 10 to 12 days.

The Dodd--Frank Act of 2010 was intended to reform financial policies in order to prevent another massive crisis such as the financial meltdown of 2008. Dodd--Frank is largely premised on the diagnosis that connectedness was the major problem in that crisis -- that is, that financial institutions were overexposed to one another, resulting in a possible chain reaction of failures.

In this book, Hal Scott argues that it is not connectedness but contagion that is the most significant element of systemic risk facing the financial system. Contagion is an indiscriminate run by short-term creditors of financial institutions that can render otherwise solvent institutions insolvent.

It poses a serious risk because, as Scott explains, our financial system still depends on approximately $7.4 to $8.2 trillion of runnable and uninsured short-term liabilities, 60 percent of which are held by nonbanks. Scott argues that efforts by the Federal Reserve, the FDIC, and the Treasury to stop the contagion that exploded after the bankruptcy of Lehman Brothers lessened the economic damage.

And yet Congress, spurred by the public's aversion to bailouts, has dramatically weakened the power of the government to respond to contagion, including limitations on the Fed's powers as a lender of last resort.

Offering uniquely detailed forensic analyses of the Lehman Brothers and AIG failures, and suggesting alternative regulatory approaches, Scott makes the case that we need to restore and strengthen our weapons for fighting contagion.