Who Killed M3?

Not long ago I wrote a post about a National Bureau of Economic Research study that blamed the Great Recession on a bank panic rather than that usual suspect, the sub-prime mortgage crisis. There was a sub-prime crisis, sure, but it was just the catalyst for the much more damaging bank panic that followed.

All this relates back to a little-noticed structural change in the U.S. banking system where Nixon-era deregulation led to the growth of money market funds that killed the savings deposits that had traditionally backed most bank lending. Rising to replace savings (and make a lot more profit) was loan securitization and REPO collateralized inter-bank lending enabled by Reagan-era deregulation. The Great Recession was caused by the banks all losing faith in each other, with commercial lending grinding to a halt as it continues to in many places even today.

Heck of a story, eh? Now that I had a better understanding of the actual crisis, I immediately began to wonder how we can avoid it happening again?

We can't.