It also depends on what we mean by cause of the crisis – I agree that the structural issues were the underlying “cause”, and would have lead to hardship in Europe.  I just think a lot of the extra financial market issues which the rest of the world is stuck with is due to debates around who burdens the debt given lack of clarity around the LOLR.

I’m sure we’ll discuss things another time – we’ve gone and filled up this comment thread nicely 😉 .  Its always useful for me to hear all these things at least 🙂

Sorry, should read “not totally on board with the LOLR…”, whoops!

Yes, I agree that we mostly agree. I’m on board on the LOLR as cause of credit bubble etc, but it’s a really interesting idea. The main area of divergence is about the fundamental cause of the Euro crisis, but that’s a separate issue for another thread. Thanks

I don’t think there is too much we really disagree on – its really just my interest in constantly talking that makes these threads go on as long as they do 😉

With the bank run issue, the fact that we don’t know which assets are “good” or “bad” at the time of the run – combined with the fact that the expectation of the support of a LOLR implies a socialisation of some of the “risk” associated with assets that “go bad” – creates much of the issue here.  As soon as we are backstopping creditors who indirectly put their money into “bad assets” due to the inability to split them in real time we get a moral hazard issue.  My only real point would be that we need to make the conditions of support clearer, and accept that there will be occassions where this happens.  One the US did this, the GFC effectively ran its course – if it wasn’t for Europe the crisis would have been done by June 2009.

Many policy makers in Europe agree that the debt is unsustainable, and also believe the PIIGS should have to deal with the cost of it.  If that is the case, let them default and/or leave the currency union – the current half/half solutions we have merely cause uncertainty.

 I’ll move this to a brand new comment 🙂

(Getting small again!)
You’re right, faced with uncertainty about bank solvency there could easilty be a run on an otherwise-solvent bank (ex ante or ex post). But perhaps with LOLR support against good assets this run can be allowed to run its course. The regulators can look at the bank internals and remove the information asymmetry, thus sending a solvency signal to deposit holders.
As for PIIGS debt, my argument is that it’s not sustainable due to the way the currency union is set up.

 Isn’t the key thing here that banks that are “probably” solvent ex-ante could still experience runs – but since you do not know this you have to give said insurance more generally, implying that banks will take on more risk.

It is an issue of the belief of what the central bank/government would do, combined with asymmetric information about bank quality – which is why transparency and a “time consistent” path for bailouts (or not) needs to be established.

I was just trying to be more clear regarding what I meant by good – I don’t think we disagree 🙂  The main thing once again is whether we believe there is a run on government debt that is otherwise sustainable (even if still the result of an internal “imbalance”).

I suppose that my argument is that deposit insurance is probably not a necessary part of LOLR. As per Bagehot only banks that are solvent in “normal” time (I think this aligns with your ex ante) should get it. Otherwise bond holders should become equity holders etc.
Sorry, I wasn’t clear about “good”. With uncompetitive economies in a fixed currency set up like the Euro, the deficits cannot be stopped. That was Godley’s insight.