Tag: 2008 financial crisis

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  I’m not a person that understands the stock market all that well, but I remember someone significant in the media saying watch the bond market – when that goes South, head for the bunker, because all hell is soon to break loose.  Why is that?  This was back during the last disastrously dip and […]

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In this AEI Events Podcast, AEI’s Peter J. Wallison welcomes Sanjai Bhagat of the University of Colorado Leeds School of Business to discuss Dr. Bhagat’s new book, Financial Crisis, Corporate Governance, and Bank Capital (Cambridge University Press, March 2017).

Dr. Bhagat emphasizes the Dodd-Frank Act’s costs to the US economy and highlights that, despite its stated intentions to eliminate “too big to fail,” investors and economic policymakers still believe that banks are still too big to fail. To address systemic risk and prevent a future financial crisis, bank executive compensation needs to be addressed. To this end, Dr. Bhagat emphasizes the importance of aligning management incentive with sound financial practices, and he suggests restructuring bank executive and director incentive program to include only restricted stock and restricted stock options with long vesting periods. He also underlines the importance of financing banks with considerably more equity. He clarifies that the 2007–08 financial crisis was not exacerbated by misalignment of corporate management incentive, but that this misalignment exacerbated the financial crisis.

Flying into an Economic Coffin Corner

 

US_Air_Force_U-2_(2139646280)

When a U-2 spy plane flies very high, the air gets very thin. This causes the the amount of air going over the wing to fall, so the wing thinks it is flying slower and therefore will stall (lose all lift) and fall out of the sky at much higher real speeds. The U-2 has another limit, its critical Mach number. This is the highest speed before the airplane will begin to tuck under and lose control due to transonic effects on the wing and tail.

Normally, there is a huge gap between the stall speed of the airplane and its critical Mach number. But as you climb higher, these numbers begin to converge. At the U-2’s highest operational altitude, the difference between the stall speed and the critical Mach number can be as little as five knots. This is known to U-2 pilots as the “coffin corner.” In the coffin corner, if you fly any faster, you lose control. Fly any slower … and you lose control. It’s extremely dangerous, and normally the plane would only be flown on autopilot in this region.