Real and Pseudo-Financial Crises, the Chinese share market crash and Anna Schwartz

If we could take time out from the breathless journalism about the Chinese stock market, which some people may have heard of before this week, it’s crash should be seen through the lens that Anna Schwartz developed in 1987 of a pseudo financial crisis and a financial crisis.

Her paper is written at the same time as the 1987 stock market crash. On financial crises, Anna Schwartz said:

image

As for those pseudo financial crises, she said:

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Schwartz’s principal concern with regard to pseudo financial crisis was:

proposals to deal with pseudo-financial crises is the perpetuation of policies that promote inflation and waste of economic resources

As we are talking about the Chinese stock market, Anna Schwartz also wrote about the concepts of real systemic international risk and and pseudo international systemic risk.

Once again, and as with pseudo financial crises and real financial crises, what distinguishes real systemic international risk and pseudo international systemic risk is a threat to the payment system. The threat of bank runs, which can easily be eliminated through lender of last resort facilities:

image

As always it is about the security of the payments system – of avoiding bank runs, not private losses:

image

The lesson for the day is that when people start panicking about the economy or the stock market or international markets, don’t go to a macroeconomist for advice, go to a monetary historian. They have seen it all before.

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