UI study suggests that economic damage caused by financial crises can be helped by cash from the Fed
Bank failures and the economy
A University of Iowa economistís new study of Depression-era bank failures in Mississippi suggests that the overall economic damage caused by financial crises can be mitigated by cash infusions from the Federal Reserve.
Nicolas Ziebarth, assistant professor of economics in the Tippie College of Business, says the study also raises questions about the traditional thinking that economies need a long time to recover after suffering a serious financial shock.
Ziebarth says Mississippi is an interesting laboratory to study the economic impacts of bank failures and government fiscal policy because the state is divided between two Federal Reserve districts. Southern Mississippi was in the Atlanta Fed district, which took an aggressive policy after a 1930 banking crisis to aggressively stem bank runs by extending loans that propped up struggling banks. The northern part of the state was in the St. Louis Fed district, which took a far more conservative approach in lending cash to banks.
The Mississippi bank panic in 1930 saw statewide deposits fall by 55 percent in less than two months, and did not recover until 1934. But more banks remained open in the Atlanta Fed district than in the St. Louis district because of Atlantaís more aggressive lending policies. Within two months of the crisis, 35 percent of the banks in the St. Louis district of Mississippi had gone out of business, compared to only 20 percent of the banks in the Atlanta district.