June 7, 2021
11 am EST
“Payment Crises and Consequences.“
Gary Richardson, Professor, Department of Economics, University of California at Irvine
Padma Sharma, Federal Reserve Bank of Kansas City
Chris Koch, Federal Reserve Bank of Dallas
Gary Richardson is a Professor of Economics at University of California at Irvine and a Research Associate at the National Bureau of Economic Research. He served as the Historian of the Federal Reserve System from 2012 to 2016. He works on a range of topics in US and European history including the political origins of the Industrial Revolution, the history of financial crises, and the history of the Federal Reserve.
Banking-system shutdowns during contractions scar economies. Four times in the last forty years, governors suspended payments from state-insured depository institutions. Suspensions of payments in Nebraska (1983), Ohio (1985), and Maryland (1985), which were short and occurred during expansions, had little measurable impact on macroeconomic aggregates. Rhode Island’s payments crisis (1991), which was prolonged and occurred during a recession, lengthened and deepened the downturn. Unemployment increased. Output declined, possibly permanently relative to what might have been. We document these effects using a novel Bayesian method for synthetic control that characterizes the principal types of uncertainty in this form of analysis. Our findings suggest policies that ensure banks continue to process payments during contractions – including the bailouts of financial institutions in 2008 and the unprecedented support of the financial system during the COVID crisis – have substantial value.