14.09: Financial Crises

Transcription

1 14.09: Financial Crises IAP 2017 Units: [P/D/F] Location: E Lectures in January 2016 From 10:30am-12pm on the following days: 1/23, 1/24, 1/25, 1/26, 1/30, 31/1, 2/1,2/2 Associate Professor Alp Simsek E52-552, Office hours: Thursdays, 1:30pm-2:30pm asimsek@mit.edu Course Overview and Objectives This mini-course is an introduction to economic theories of financial crises. We will focus on financial intermediaries ( banks ), and analyze the channels by which their problems are transmitted to the nonfinancial sectors of the economy. We will focus on the amplification mechanisms that exacerbate financial crises, such as leverage, fire sales, bank runs, interconnections, and complexity. We will also explore the different perspectives on the origins of crises, such as mistaken beliefs and moral hazard, and discuss the optimal regulation of the financial system. Throughout, we will draw upon examples from financial crises around the world, especially the recent subprime financial crisis. Our objective is to gain a deeper understanding of these events by using economic theory as well as empirical evidence. The course will meet for 8 lectures in the last two weeks of IAP from Monday until Thursday. Specifically, the lecture dates are: January 23, 24, 25, 26, 30, 31 and February 1,2. The lectures will take place between 10:30am-12pm in E Course website: TBA Prerequisites: There are not formal prerequisites for the course. But you should be committed to come to the lectures and engage with the material. Calculus (18.01) and introductory macroeconomics (14.02) would be helpful but they are not required. Requirements and Grading The course will be graded on a pass/fail scale. Class participation will account for 30% of the grade. A take-home exam will account for the remaining 70%. The exam will be distributed at the end of the last lecture (on February 2) and it will be due in 24 hours (on February 3). Textbook and Readings There is no required textbook. We will mainly rely on lecture notes. A number of optional articles complement the lecture notes and will be made available through the website. 1

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3 Course Plan (Tentative) January 23 (Mo) January 24 (Tu) January 25 (Wed) January 26 (Th) January 30 (Mon) January 31 (Tu) February 1 (Wed) February 2 (Th) Understanding Financial Crises: Lessons from History Borrowing Constraints, the Net Worth Channel, and the Credit Crunch Leverage, Fire Sales, and Amplification Mechanisms Understanding Banks Losses: Moral Hazard or Mistakes Maturity Mismatch and Bank Runs Collateralized Debt and Information Based Panics Interconnections and Panics Lessons and Policy Responses February 2 (Th) Take Home Exam, due on Friday, February 3 3

4 Readings by Topic (Tentative) You are mainly responsible for reading and understanding the lecture notes. The readings are optional and complement the lecture notes. A few of the papers are somewhat technical, as they are written for a more specialized audience, but you might find their introductions accessible. The starred readings are more closely related to the material that will be covered in lectures. January 23 Understanding Financial Crises: Lessons from History Brunnermeier, Markus K. (2009). Deciphering the Liquidity and Credit Crunch Journal of Economic Perspectives 23, no. 1, p (*) Allen, Franklin, and Douglas Gale (2009). Understanding Financial Crises. Oxford University Press, Chapter 1. January 24 Borrowing Constraints, the Net Worth Channel, and the Credit Crunch (*) Holmstrom, Bengt, and Jean Tirole (1997). Financial Intermediation, Loanable Funds, and the Real Sector. Quarterly Journal of Economics, p Chodorow-Reich, Gabriel (2014) The Employment Effects of Credit Market Disruptions: Firm-level Evidence from the Financial Crisis. Quarterly Journal of Economics 129, p (*) Campello, Murillo, John R. Graham, and Campbell R. Harvey (2010). The Real Effects of Financial Constraints: Evidence from a Financial Crisis. Journal of Financial Economics 97, no. 3, p January 25 Leverage, Fire Sales, and Amplification Mechanisms (*) Geanakoplos, John (2009). The Leverage Cycle. in NBER Macroeconomics Annual 2009, Volume 24, pp University of Chicago Press. (*) Jorion, Philippe (2000). Risk Management Lessons from Long Term Capital Management. European Financial Management 6, no. 3, p Shleifer, Andrei, and Robert Vishny. (2011). Fire Sales in Finance and Macroeconomics. Journal of Economic Perspectives 25, no. 1, p January 26 Understanding Banks Losses: Moral Hazard or Mistakes (*) Rose, Clayton S., Daniel Baird Bergstresser, and David Lane (2011). The Tip of the Iceberg: JP Morgan Chase and Bear Stearns (A). Harvard Business School Case

5 Acharya, Viral, Thomas Philippon, Matthew Richardson, and Nouriel Roubini (2009). The Financial Crisis of : Causes and Remedies. Financial Markets, Institutions & Instruments 18, no. 2, p Barberis, Nicholas C. (2013). Psychology and the Financial Crisis of Financial Innovation: Too Much Or Too Little? p Cheng, Ing-haw, Sahil Raina, and Wei Xiong (2014). Wall Street and the Housing Bubble, American Economic Review, 104, p Ma, Yueran (2014). Bank CEO Optimism and the Financial Crisis, Harvard University working paper. Akerlof, George A. and Paul M. Romer (1993), Looting: The Economic Underworld of Bankruptcy for Profit. Brookings Papers on Economic Activity, p January 30 Maturity Mismatch and Bank Runs (*) Diamond, Douglas W. and Philip H. Dybvig (1983). Bank Runs, Deposit Insurance, and Liquidity. Journal of Political Economy, p Bordo, Michael D. (1990). The Lender of Last Resort: Alternative Views and Historical Experience. FRB Richmond Economic Review 76, no. 1, p Gorton, Gary, and Andrew Metrick (2013). The Federal Reserve and Panic Prevention: The Roles of Financial Regulation and Lender of Last Resort. Journal of Economic Perspectives 27, no. 4, p (*) Shin, Hyun Song (2009). Reflections on Northern Rock: The Bank Run that Heralded the Global Financial Crisis. Journal of Economic Perspectives 23, no. 1, p January 31 Collateralized Debt and Information Based Panics (*) Holmstrom, Bengt (2015). Understanding the Role of Debt in the Financial System, Bank for International Settlements Working Paper No Gorton, Gary B. (2010). Questions and Answers about the Financial Crisis-Prepared for the US Financial Crisis Inquiry Commission. Available at SSRN (*) Caballero, Ricardo J. and Arvind Krishnamurthy (2008). Collective Risk Management in a Flight to Quality Episode. The Journal of Finance, 63, no. 5, p

6 February 1 Interconnections and Panics McDonald, Robert and Anna Paulson (2015). AIG in Hindsight. Journal of Economic Perspectives 29, no. 2, p (*) Acemoglu, Daron, Asuman Ozdaglar, and Alireza Tahbaz-Salehi (2013). Systemic Risk and Stability in Financial Networks. No. w National Bureau of Economic Research. (*) Caballero, Ricardo J. and Alp Simsek (2013). Fire Sales in a Model of Complexity. The Journal of Finance 68, no. 6, p February 2 Lessons and Policy Responses Bernanke, Ben S. (2009). The Crisis and the Policy Response. Stamp Lecture, London School of Economics, January 13 (2009). Kohn, Donald L. (2010). The Federal Reserve's Policy Actions During the Financial Crisis and Lessons for the Future: A Speech at Carleton University, Ottawa, Canada, May 13 (2010). Swagel, Phillip (2015). Legal, Political, and Institutional Constraints on the Financial Crisis Policy Response. Journal of Economic Perspectives 29, no. 2, p (*) Caballero, Ricardo J. (2010). Sudden Financial Arrest. IMF Economic Review 58, no. 1, p (*) Hanson, Samuel G., Anil K. Kashyap, and Jeremy C. Stein. A Macroprudential Approach to Financial Regulation. Journal of Economic Perspectives 25, no. 1 (2011): Blanchard, Olivier, Giovanni Dell Ariccia, and Paolo Mauro (2010). Rethinking Macroeconomic Policy. Journal of Money, Credit and Banking, 42, p