Financial Booms & Busts Fall 2011 Exploring The Origins and Ramifications of Bubbles, Manias, Panics & Crashes

Transcription

1 Financial Booms & Busts Fall 2011 Exploring The Origins and Ramifications of Bubbles, Manias, Panics & Crashes Course Description This course is intended to provide an overview of extremes (characterized by both extraordinary optimism and severe despair) that have taken place in financial markets. Although the course can best be thought of as a survey, particular attention will be paid to 20 th and 21 st century events as well as the underlying commonalities that seem to recur in booms and busts. Although the course is focused upon bubbles, crashes, manias, panics, and crises, it begins by evaluating the academic literature that dismisses the likelihood of these events namely the efficient market hypothesis. A critical review of the theory is presented, as well as some competing theories. Academic and managerial perspectives are simultaneously evaluated. Possible explanations for the existence of financial extremes are then evaluated (psychological factors, monetary policy, etc.) before the course turns to the ramifications of and policy responses to financial extremes. The goal for the first half of the course will be for the class to develop a multi-disciplinary theoretical framework through which to evaluate and contextualize financial market extremes. The second half of the course will focus on case studies of financial market booms and busts. Each example will be evaluated via the multidisciplinary theoretical lens developed in the first half of the course. The course concludes with the class collectively developing the anatomy of a typical financial market extreme. While each of the studied cases will have had unique elements, the objective for the course will be to coalesce these findings into an understanding of the general characteristics that precede, promote, and ultimately reverse bubbles and manias into crashes, panics, or crises. The semester will end with student groups presenting what they believe to be the most likely next boom-bust cycle. While the course will serve as useful preparation for students interested in further academic work on the topic of asset pricing, behavioral finance, or monetary policy, it is also designed to given students an appreciation for the complexities of financial market extremes and policy responses to them. Upon completion of the course, students will be more informed participants in (as investors) and regulators of (as voting citizens) financial markets.

2 Evaluation Criteria / Requirements Classroom Participation (25%) The course is designed to be a highly interactive and critical evaluation of the required readings. Given this design, it is absolutely essential that all students come prepared (having completed the readings) and participate in classroom discussion. Weekly One-Page Reactions (15%) Each week, on the night before the seminar, students are to to the instructor a one-page written reaction to the readings by 9pm. These weekly reaction papers can be about any topic addressed in that week s reading materials. Final Project / Presentations (15%) The last meeting of the seminar will be used for student presentations. These presentations will be about potential future financial market extremes. Students will work in teams of three. Each presentation will be no more than 5 minutes in length, and teams should make their story as believable as possible. Summary handouts (1 page) are recommended. One or two guests who actively participate in the financial markets will likely join this session to supplement instructor feedback. Outline / Abstract / Bibliography (10%) An outline or abstract of the final paper (see below) will be due before Thanksgiving break. Please be as thorough as possible in providing an overview of the topic you plan to address. Final Paper (35%) The last requirement for each student is the on-time submission of a final paper. Although the paper may be about any topic related to financial market extremes, it is important that it be more than simple fact reporting. The paper is expected to be approximately 15 pages (but no more than 20 pages) in length (double spaced, Times Roman 12 point font, with 1 margins). Instructor Contact Information Vikram, PhD vikram.mansharamani@aya.yale.edu cell, office

3 Course Outline Week 1: Introduction and Overview: Why Study Financial Market Extremes? (READING: 85 pages) Week 2: A (Brief) History of Financial Markets and Speculation (READING: 52 pages + video) Week 3: The Theoretical Context: (In)Efficiency and Asset Markets (READING: 86 pages + video) Week 4: The Psychological Roots of Extremes: Behavioral Finance and Asset Prices (READING: 116 pages) Week 5: The Macroeconomic Origins of Extremes: Monetary Policy & Credit (READING: 246 pages) Week 6: The Ramifications of and Policy Responses to Financial Market Extremes (READING: 142 pages) Week 7: Financial Market Extremes in the 17 th, 18 th, & 19 th Centuries (READING: 225 pages) Week 8: The Great Depression (READING: 290 pages) Week 9: The Japanese Boom and Bust (READING: 267 pages) Week 10: The Asian Financial Crisis (READING: 146 pages) Week 11: The Internet / Technology Bubble (READING: 214 pages) Week 12: The Global Credit Crunch of 2008 (READING: 294 pages) Week 13: Course Summary & Student Presentations (READING: 141 pages)

4 Weekly Readings Week 1: Introduction and Overview: Why Study Financial Market Extremes? (PLEASE READ BEFORE FIRST CLASS) They Burst. Hoboken, NJ: Wiley, Foreword and Introduction. (11 pages) Introduction; Chapter 1: The Central Problem has been Solved ; Chapter 2: Warning Ignored: Latin America s Crises (53 pages) Week 2: A (Brief) History of Financial Markets and Speculation New York, NY: Penguin Putnam, Chapter 1: This Bubble World: The Origins of Financial Speculation (29 pages) Kindelberger, Charles P. & Aliber, Robert Z. Manias, Panics, and Crashes: A History of Financial Crises. Hoboken, NJ: John Wiley & Sons, Chapter 1: Financial Crisis: A Hardy Perennial (23 pages) VIDEO: THE ASCENT OF MONEY (2 hour version) ( Week 3: Microeconomic Context: (In)Efficiency and Asset Markets They Burst. Hoboken, NJ: Wiley, Chapter 1. (14 pages) Fama, Eugene F. Random Walks in Stock Market Prices. Financial Analysts Journal. September-October 1965, p (5 pages) Lo, Andrew W. The Adaptive Markets Hypothesis: Market Efficiency From an Evolutionary Perspective. Journal of Portfolio Management. 2004, p (14 pages) Barlevy, Gadi. Economic Theory and Asset Bubbles. Economic Perspectives of the Federal Reserve Bank of Chicago. 3Q2007, p (15 pages) Part IV: Attempts to Rationalize Exuberance (32 pages) Soros, George. The Theory of Reflexivity. Talk Delivered on April 26, 1994 to the MIT Department of Economics World Laboratory Conference. (6 pages)

5 VIDEO: George Soros Interview at MIT by Roberto Caballero ( Week 4: The Psychological Roots of Extremes: Behavioral Finance and Asset Prices They Burst. Hoboken, NJ: Wiley, Chapter 3. (25 pages) Kahneman & Tversky. Judgment Under Uncertainty: Heuristics & Biases. Science. September 1974, p (7 pages) Akerlof, George A. & Shiller, Robert J. Animal Spirits: How Human Psychology Drives the Economy and Why it Matters for Global Capitalism. Princeton, NJ: Princeton University Press, Part I: Animal Spirits (48 pages) Part III: Psychological Factors (35 pages) Week 5: The Macroeconomic Origins of Extremes: Monetary Policy & Credit They Burst. Hoboken, NJ: Wiley, Chapter 2. (23 pages) Fisher, Irving. The Debt-Deflation Theory of Great Depressions. Econometrica, 1933, p (18 pages) Cooper, George. The Origin of Financial Crises: Central Banks, Credit Bubbles, and the Efficient Market Fallacy. New York, NY: Vintage, (172 pages) Garrett, Garet. Anatomy of the Bubble in A Bubble that Broke the World. Mansfield Center, CT: Martino Publishing, (33 pages) OPTIONAL: Minsky, Hyman. Can IT Happen Again? Armonk, NY: Sharpe Week 6: The Ramifications of and Policy Responses to Financial Market Extremes They Burst. Hoboken, NJ: Wiley, Chapter 4. (16 pages) HarperCollins Publishers, Chapter 1: Bubbles R Us (24 pages) Bernanke, Ben. Deflation: Making Sure IT Doesn t Happen Here. Remarks before the National Economists Club, Washington DC, November (10 pages)

6 Kindelberger, Charles P. & Aliber, Robert Z. Manias, Panics, and Crashes: A History of Financial Crises. Hoboken, NJ: John Wiley & Sons, Chapter 10: Policy Responses: Letting it Burn Out, and Other Devices (22 pages) Part V: A Call to Action (32 pages) Chapter 5: Policy Perversity ; Chapter 6: Masters of the Universe (38 pages) Week 7: Financial Market Extremes in the 17 th, 18 th, & 19 th Centuries New York, NY: Penguin Putnam, Chapter 2: Stockjobbing in Change Alley: The Projecting Age of the 1690 s ; Chapter 3: The-Never-to-be-Forgot or Forgiven South-Sea Scheme ; Chapter 4: Fools Gold: The Emerging Markets of the 1820s ; Chapter 5: A Ready Communication: The Railway Mania of 1845 ; Chapter 6: Befooled, Bewitched, and Bedeviled: Speculation in the Gilded Age (161 pages) HarperCollins Publishers, Chapter 2: The Telegraph ; Chapter 3: The Railroads (50 pages) They Burst. Hoboken, NJ: Wiley, Chapter 6. (14 pages) Week 8: The Great Depression Allen, Frederick Lewis. Only Yesterday: An Informal History of the 1920s. New York, NY: Harper Row Chapters VI - XIV (195 pages) Spring, Samuel. Whirlwinds of Speculation The Atlantic Monthly, April (10 pages) New York, NY: Penguin Putnam, Chapter 7: The End of a New Era: The Crash of 1929 and its Aftermath (38 pages) They Burst. Hoboken, NJ: Wiley, Chapter 7. (21 pages) HarperCollins Publishers, Chapter 4: The Financial New Deal (26 pages)

7 Week 9: The Japanese Boom and Bust Koo, Richard C. The Holy Grail of Macroeconomics: Lessons from Japan s Great Recession. New York, NY: John Wiley & Sons, Chapter 1: Japan s Recession ; Chapter 2: Characteristics of Balance Sheet Recessions ; Chapter 3: The Great Depression was a Balance Sheet Recession ; Chapter 4: Monetary, Foreign Exchange, and Fiscal Policy During a Balance Sheet Recession ; Chapter 5: Yin and Yang Economic Cycles and the Holy Grail of Macroeconomics (184 pages) New York, NY: Penguin Putnam, Chapter 9: Kamikaze Capitalism: The Japanese Bubble Economy of the 1980s (45 pages) Chapter 3: Japan s Trap (21 pages) They Burst. Hoboken, NJ: Wiley, Chapter 8. (18 pages) OPTIONAL: Wood, Christopher. The Bubble Economy: Japan s Extraordinary Speculative Boom and the Dramatic Bust of the 90s. Solstice Publishing, Week 10: The Asian Financial Crisis Lewis, Michael. Panic: The Story of Modern Financial Insanity. New York, NY: WW Norton, Part II: Foreigners Gone Wild (83 pages) Yellen, Janet. The Asian Financial Crisis Ten Years Later: Assessing the Past and Looking to the Future. Speech to the Asia Society of Southern California, February 6, (14 pages) ( Chapter 4: Asia s Crash (24 pages) They Burst. Hoboken, NJ: Wiley, Chapter 9. (19 pages) Geithener, Timothy. Reflections on the Asian Financial Crisis. Remarks at the Asian Financial Services Conference, Federal Reserve of SF, June (6 pages) ( Week 11: The Internet / Technology Bubble Chapter 1: The Stock Market Level in Historical Perspective ; Part I: Structural Factors (68 pages)

8 2009. Chapter 7: Greenspan s Bubbles (14 pages) Lewis, Michael. Panic: The Story of Modern Financial Insanity. New York, NY: WW Norton, Part III: The New New Panic (102 pages) HarperCollins Publishers, Chapter 5: The Internet (30 pages) Week 12: The Global Credit Crunch of Chapter 8: Banking in the Shadows ; Chapter 9: The Sum of All Fears (28 pages) They Burst. Hoboken, NJ: Wiley, Chapter 10. (20 pages) Lewis, Michael. Panic: The Story of Modern Financial Insanity. New York, NY: WW Norton, Part IV: The People s Panic (102 pages) HarperCollins Publishers, Chapter 6: Real Estate (28 pages) Koo, Richard C. The Holy Grail of Macroeconomics: Lessons from Japan s Great Recession. New York, NY: John Wiley & Sons, Chapter 7: Ongoing Bubbles and Balance Sheet Recessions ; Chapter 8: World in Balance Sheet Recessions (69 pages) Greenspan, Alan. The Crisis working paper (originally presented at Brookings Institute), April 15, (50 pages) Week 13: Course Summary & Student Presentations Chapter 10: The Return of Depression Economics (10 pages) HarperCollins Publishers, Conclusion. (17 pages) Part II: Cultural Factors (64 pages) They Burst. Hoboken, NJ: Wiley, Chapter 11, Chapter 12. (50 pages)

9 Required Texts Allen, Frederick Lewis. Only Yesterday: An Informal History of the 1920s. Cooper, George. The Origin of Financial Crises: Central Banks, Credit Bubbles, and the Efficient Market Fallacy. Gross, Daniel. Pop! Why Bubbles are Great for the Economy. Krugman, Paul. The Return of Depression Economics and the Crisis of Lewis, Michael. Panic: The Story of Modern Financial Insanity. They Burst. Shiller, Robert J. Irrational Exuberance. Koo, Richard C. The Holy Grail of Macroeconomics: Lessons from Japan s Great Recession. READING PACKET TO BE AVAILABLE FOR PURCHASE WITH ALL ARTICLES Optional Texts Garrison, Roger. Time & Money: The Macroeconomics of Capital Structure. New York, NY: Routledge, Knoop, Tood A. Modern Financial Macroeconomics: Panics, Crashes, and Crises. Le Bon, Gustave. The Crowd: A Study of the Popular Mind. Minsky, Hyman. Can IT Happen Again? Essays on Instability and Finance. Sorkin, Andrew R. Too Big to Fail. New York, NY: Viking, Wood, Christopher. The Bubble Economy: Japan s Extraordinary Speculative Boom of the 80s and the Dramatic Bust of the 90s.