Syllabus FIN 345: The History of Financial Crises

Transcription

1 Syllabus FIN 345: The History of Financial Crises Peter Koudijs (subject to change) Financial crises are as old as financial markets themselves. There are many similarities between historical events. The 2007/8 credit crisis, for example, is far from unique. More often than not financial crises are the result of bubbles in certain asset classes or can be linked to a specific form of financial innovation. This course gives an overview of the history of financial crises. We go back almost 400 years and start with the Tulip mania of From there we will slowly make our way back to today, encountering many crisis episodes that are relevant from today s point of view. The course is organized around three broader themes that were all painfully visible during the 2007/2008 crisis: 1. Asset prices bubbles: the recent crisis started in the housing market, house prices were overvalued and their collapse initiated the crisis. 2. Impact of banks and credit: the shock coming from the fall in real estate prices was relatively small, but was amplified to a full blown crisis through the banking system and the collapse in credit. 3. Sovereign risk: bailing out the banks brought many countries in fiscal problems, initiating a new sovereign debt crisis. We will see that these are recurring themes in the history of financial crises. The purpose of this course is to understand the causes of past crises and to develop a conceptual framework that ties common elements together. We will discuss the lessons that we can draw for financial markets today. Contact information Instructor: Peter Koudijs Assistant-professor in Finance Office: Faculty Building East koudijs@stanford.edu Webpage: Office hours: by appointment Faculty assistant: Jennifer Smith Office: Faculty Building West Jennifer_E_Smith@stanford.edu

2 Teaching Goals The goal of this course is to understand the broader, underlying mechanisms at play in financial crises. In addition, students are expected to approach the crisis episodes in a critical way. There will NOT be an exam for this course. Grades depend on classroom participation and two projects. Teaching format The class will be taught through the discussion of specific cases. Students are expected to carefully prepare the readings for each case. The course reader contains sets of study questions to guide students through the readings of each class. The case will be introduced by the instructor, but students themselves are responsible for the discussion. Because of this format, it is essential that students do the readings. Classroom participation will count toward 30% of the final grade. Project 1 For the first project, students form groups of 3 or 4 and pick a financial crisis not covered in class. Students will present their findings in one of the last four classes (see Schedule). In their discussion of the crisis in question students have to cover the following points: 1. Provide a short summary of the episode 2. Provide an analysis of the crisis, make sure to discuss a. Did it involve an asset price bubble, a banking crisis or sovereign debt? b. What was the underlying cause? c. What was the immediate cause? d. And anything else you think relevant for understanding the episode 3. What elements of this crisis are relevant for understanding the recent crisis? 4. What elements do you think are relevant from a broader perspective? 5. How does this crisis relate to the broad overview we have discussed? I.e. what are new insights and what are parallels with other crises? 6. Discuss the policy prescriptions that can be drawn from this event. At the end of the second class (January 8) a list of suggested crisis episodes will be made available with some suggested literature. The final choice will have to be communicated to the instructor by January 29. When communicating their choice, students should indicate whether there are any days that they are unable to present (see Attendance rules). If no such indication is made, the instructor will assume that a group can present on any of the four possible dates.

3 Different groups are not allowed to pick the same crisis episode. If there is competition for a specific crisis, allocation will be on first come, first serve basis. But rest assured: there are plenty crises to choose from. Except for the recent crisis, the episodes the instructor will cover in class all took place before World War II. This means that students will have their pick of post-wwii crises, which tend to be more accessible in terms of finding literature, collecting data etc. The class presentation will count towards 40% of the final grade. Project 2 The second project is on an individual basis and has to be handed in on the last day of class in print. Because of the deadline to hand in the final grades late submissions are not accepted! Students are asked to write a short review (maximum 5 pages, spacing 1.5) of one the many academic and journalistic books that were published about the previous crisis. Andrew Lo s (2011) review of a large number of books about the recent crisis is a useful starting point, but students can elect different books if the instructor approves this. Admati/Hellwig s The Bankers New Clothes, Blinder s After the Music Stopped and Mian/Sufi s House of Debt are excellent books that came out after Lo s review. Students should communicate their choice before February 17. Multiple students are allowed to review the same book, but the review has to be individual. The book review will count for 30% towards the final grade. The review should not just be a simple summary of the book. The most important thing for the students is to display critical thinking and form an interesting and informed opinion about the book. As a starting point students should broadly discuss the following in their book review: 1. Every book should highlight a certain specific element of the recent crisis: discuss and relate it to the historical overview of the course. Is this point unique or are there any obvious historical parallels? 2. Can you relate this argument to any of the broader themes we discussed in class? How does it change the insights we have developed? Do you interpret any other historical episodes differently after reading this book? 3. What are the lessons for the future that the author draws? What are the policy prescriptions? 4. How do you evaluate the author s arguments in the light of the historical overview we have been building over the last months? Current events We live in exciting times. We will therefore reserve ample time to discuss current events in class. Students are encouraged to send the instructor recent newspaper or magazine articles the day before class that they like to discuss.

4 Attendance rules Attendance is compulsory. Nevertheless students are allowed to miss up to two sessions, if and only if they communicate this to the instructor in advance and provide a clear motivation. Any absences in excess of this number will affect the grade for class participation. Because classes are built around group discussion, students need to be on time and it is not allowed to leave early, except if the instructor gives his permission beforehand. Students adding this course after the first day of class are asked to write short reports about the cases they have missed. Logistics Classes will run for 1 hour and 45 minutes. Readings A course reader will be digitally available through Coursework which includes (almost) all the relevant readings. For the discussion of the Tulipmania students are asked to purchase Peter M. Garber, Famous first bubbles: the fundamentals of early manias, MIT press The book costs around $15 on Amazon. Note that Garber s book is also available online through the library website. Be warned that the interface is not very user-friendly!

5 Schedule Session 1 January 6 (Tuesday) Introduction Session 2 January 8 (Thursday) Tulipmania Peter M. Garber, Famous first bubbles: the fundamentals of early manias, MIT press 2001; Chapters 1-11, p Maurits van der Veen, The Dutch Tulip Mania: The Social Politics of a Financial Bubble, mimeo 2009 Was Tulipmania irrational?, in: The Economist, October 4, 2013 Session 3 January 13 (Tuesday) South Sea Bubble Hans-Joachim Voth and Peter Temin, Prometheus Shackled: Goldsmith Banks and England s Financial Revolution after 1700 (forthcoming); chapter 5 (South Sea Bubble) end at Trading like Hoare s Session 4 January 15 (Thursday) 1763: European Banking Crisis Isabel Schnabel and Hyun Song Shin, Liquidity and contagion: the crisis of 1763, in: Journal of the European Economic Association 2004, 2(6): p Session 5 January 20 (Tuesday) 1792: Wall Street s First Panic

6 Financial crises: The slumps that shaped modern finance right, in: The Economist, April 12, 2014 section on 1792 David Moss and Cole Bolton, Wall street s First Panic, HBS case , Sept. 10, 2009 Session 6 January 22 (Thursday) Antebellum New York: Banking Regulation After Crisis David Moss and Cole Bolton, The Campaign for Bank Insurance in Antebellum New York, HBS case , Dec. 20, 2007 Frederic Mishkin, The Economics of Money, Banking, and Financial Markets, Global 10th edition (2013), Chapter 10: Banking and the management of financial institutions, p Session 7 The Crisis of 1907 January 27 (Tuesday) Financial crises: The slumps that shaped modern finance right, in: The Economist, April 12, 2014 section on 1907 Ellis W. Tallman and Jon R. Moen, Lessons from the Panic of 1907, Economic Review (1990) Robert F. Bruner and Sean D. Carr, The Panic of 1907: lessons learned from the market s perfect storm, John Wiley and Sons (2007), Chapters 13 (Trust Co. of America) and 14 (Crisis on the exchange) Session 8 January 29 (Thursday) Great Depression 1: The FED and the 1931 US Banking Crisis Financial crises: The slumps that shaped modern finance right, in: The Economist, April 12, 2014 section on

7 David Moss and Cole Bolton, The Federal Reserve and the Banking Crisis of 1931, HBS case , Jan 20, 2009 Frederic Mishkin, The Economics of Money, Banking, and Financial Markets, Global 10th edition (2013), Chapter 14: The Money Supply Process, p Session 9 February 3 (Tuesday) Great Depression 2: Deposit Insurance and the 1933 US Banking Crisis Julio J. Rotemberg and Sabina M. Ciminero, The US Banking Panic of 1933 and Federal Deposit Insurance, HBS case , Jan 23, 2008 Frederic Mishkin, The Economics of Money, Banking, and Financial Markets, Global 10th edition (2013), Boxes on the Great Depression p and p (incl. part on recent crisis) NO CLASS February 5 (Thursday) Session 10 February 10 (Tuesday) Great Depression 3: German Banking Crisis David Moss, Cole Bolton and Andrew Novo, Danatbank, HBS case , Dec. 10, 2010 Session 11 February 12 (Thursday) Great Recession 1: Introduction & the Housing Market Read (brief introduction): Markus K. Brunnermeier, Deciphering the liquidity and credit crunch , in: Journal of Economic Perspectives 2009, 23(1): p ; p

8 Frederic Mishkin, The Economics of Money, Banking, and Financial Markets, Global 10th edition (2013), The Global Financial Crisis of p Read (housing market): Christopher Mayer, Karen Pence and Shane M. Sherlund, The rise in mortgage defaults, in: Journal of Economic Perspectives 2009, 23(1): p Excerpt from Michael Lewis, The big short in Vanity Fair, Betting on the blind side, April 2010 Session 12 February 17 (Tuesday) Great Recession 2: The Banking System Markus K. Brunnermeier, Deciphering the liquidity and credit crunch , in: Journal of Economic Perspectives 2009, 23(1): p Hyun Song Shin, Reflections on Northern Rock: the bank run that heralded the global financial crisis, in: Journal of Economic Perspectives 2009, 23(1): p Session 13 February 19 (Thursday) The Very First Latin American Debt Crisis in the 1820s Financial crime: The king of con-men, in: The Economist December 22, 2012 Carlos Marichal, A century of debt crises in Latin America: from independence to the Great Depression, , Princeton UP Chapters 1 and 2 (p.12-67), stop on p. 55 Session 14 February 24 (Tuesday) Great Depression 4: Sovereign Defaults

9 Barry Eichengreen and Richard Portes, The Interwar Debt Crisis and Its Aftermath, in: The World Bank Research Observer, Vol. 5, No. 1 (Jan., 1990), pp Session 15 February 26 (Thursday) The European Debt Crisis Philip. R. Lane, The European Sovereign Debt Crisis, in: Journal of Economic Perspectives 26-3 (2012), p One nation overdrawn - Lessons for Europe from America s history, in: The Economist, December 17, 2011 The Holy Roman Empire - European disunion done right, in: The Economist, December 22, 2012 Session 16 March 3 (Tuesday) Guest lecture Takeo Hoshi on Japanese Crisis Session 17 March 5 (Thursday) Student Presentations Session 18 March 10 (Tuesday) Student Presentations Session 19 March 12 (Thursday) Wrap up session Financial crises: The slumps that shaped modern finance right, in: The Economist, April 12, 2014