Thus far in the book, we have described the substantial variation in banking crises, capital inflows, and financial market structure across the industrialized world in the post–Bretton Woods era, and we have argued that the destabilizing impact of capital inflows is conditional on the relative prominence of banks versus non-bank financial markets. When banks compete with well-developed national securities markets to provide financing for businesses, their appetite for risk increases. As we discussed in Chapter 2, securities markets can incentivize even the most traditional commercial banks to take on more risks, even if those risks do not appear to be closely tied to securities markets. Capital inflows amplify this risk and increase the chance of a banking crisis. In contrast, when banks operate alongside relatively underdeveloped securities markets, they maintain their conservative bias and capital inflows are less likely to be destabilizing. Ultimately, it is the combination of foreign capital inflows and domestic financial market structure that tips the balance between banking stability and banking crises.

Banking stability has long been a hallmark of Germany’s economy. This image has been historically embodied by the solid stone façades of Germany’s largest banks (now replaced by the glass-and-steel Frankfurt skyline), as well as the stereotypical image of the conservative German banker, clad in his well-tailored dark suit and gazing sternly at the camera through wire-rimmed glasses. Ever since the rise to international prominence of German banking empires, such as the Fuggers, Welsers, and Rothschilds, in the sixteenth to eighteenth centuries, German bankers have had a reputation for prudence, competence, and stability. Until recently, this reputation was largely deserved: with the exception of the interwar era/Great Depression and the notable failure in 1974 of Herstatt Bank – a small private bank that highlighted problems of settlement risk in global finance – the German banking system has been remarkably resilient throughout modern history.

Chapter 2 provides an overview of theories and empirics of recession and depression, reviewing Austrian, Keynesian, and monetarist financial theories, and secular stagnation approaches to economic slumps. It looks at international , national, and regional recessions and the different shapes of business cycles (V, U, L and W). The chapter also discusses international dimensions of slumps and the scope and limits for undertaking countercyclical policies.

There is an old joke in the banking industry, told and retold at cocktail parties and conferences, about the “3-6-3 plan.” It goes something like this: bankers should pay depositors a 3 percent interest rate, issue loans at 6 percent, and head to the golf course by 3 o’clock. The joke now comes with a whiff of nostalgia for the old days of banking, in which financial intermediation was viewed as a relatively boring industry that provided simple financing for customers and predictable middle-class careers for bankers.

Chapter 8 studies the record of macroeconomic and financial crises, high inflation episodes, currency collapses, political crises, and collapses of democracy in Latin America and the financial crises and recession episodes in East Asian economies in the period 1970–2015. The chapter focuses on countries – such as Argentina and Venezuela – with high incidence of growth, inflation, and political crises, and also examines the cases of Chile and Mexico. The chapter examines the effects of the East Asian crisis of 1997–98 on Korea, Indonesia, the Philippines, Thailand, and Malaysia (the Asia-5 countries) and compares its impact on China, Vietnam, Singapore, and Hong Kong. The chapter offers a discussion on a wide variety of crisis and stabilization occurrences in a comparative perspective, highlighting economic and political economy factors.

This chapter summarizes the main episodes of output contraction and crises across subsequent decades and relevant sub-periods in the long twentieth century. It interprets the main findings of the book and draws lessons for the design and implementation of policies that can be effective to anticipate and cope with macrocrises and main recessions.

This chapter focuses on growth transition from the “Golden Age” (from 1950 to the early 1970s) of rapid growth, lower wealth inequality, and the absence of international financial crises during the stagflation in the 1970s (inflation, monetary instability, stagnation) and then to the neoliberal era (with volatile growth and frequent crises) in the core economies of North America and western Europe. The chapter identifies both economic and political economy factors surrounding the stagflation of the 1970s, in the context of challenges to US hegemony, and postauthoritarian transition in southern Europe. The chapter examines the frequency and intensity of recessive episodes and their impact on per capita GDP and investment from 1970 to 2015, affecting both core advanced countries and the European periphery.

Trust is ubiquitous in the financial system. Banks trust that customers will repay their loans. Depositors trust that banks will manage their money carefully. And banks trust other banks to provide liquidity and to remain standing day after day. But as Walter Bagehot – arguably the most prominent scholar of banking in modern history – noted in his famed account of London’s 1866 financial panic, trust in the financial system can erode from “hidden causes.” When trust is weakened, even seemingly small accidents – like the collapse of London bank Overend, Gurney, and Company, which triggered the panic – can cause systemic financial crises.