Tuesday, Sep 22, 2009

History lesson

Vox: Toxic assets in the 18th century

Problems of regulation appear whenever financial innovations change the ways capital markets operate. This column describes the 18th century emergence of the inconvertible banknote, a "toxic asset” ended by government regulation. The lesson is that free financial markets promote financial innovation, but government must provide adequate regulation keeping the market on track.

Posted by mountain goat @ 12:33 PM (759 views)
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1. mountain goat said...

What I found interesting was the constant pressure for financial innovations that reduce reserve requirements of banks. This was true of medieval times and is true today. Initially this is profitable but then the issued notes become toxic. In those days the reserves were silver and gold bullion aka specie. Today that is GBP, US dollars etc. This is worth remembering for those expecting a currency crisis. The toxic assets today are the dodgy loans. The hard currency today is the paper currency or short term gilts. When confidence evaporates again the clamor will be for these paper notes. The loans are toxic not the currency. Current government policy seeks to weaken the currency but this policy can be changed rapidly by raising interest rates for example if there were to be a currency crisis forcing the government's hand.

Tuesday, September 22, 2009 12:44PM Report Comment

2. mark wadsworth said...

Exactly. There is next to no difference between those "inconvertible notes" and any other bank bonds or RMBS or whatever. It is the same thing time and again. But you can tie this in with asset price bubbles (South Sea, 1920s US stocks and ever-recurring property price bubbles).

Tuesday, September 22, 2009 02:05PM Report Comment

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