Leveraged : The New Economics of Debt and Financial Fragility

An authoritative guide to the new economics of our crisis-filled century. Published in collaboration with the Institute for New Economic Thinking. The 2008 financial crisis was a seismic event that laid bare how financial institutions’ instabilities can have devastating effects on societies and economies. COVID-19 brought similar financial devastation at the beginning of 2020 and once more massive interventions by central banks were needed to heed off the collapse of the financial system. All of which begs the question: why is our financial system so fragile and vulnerable that it needs government support so often? For a generation of economists who have risen to prominence since 2008, these events have defined not only how they view financial instability, but financial markets more broadly. Leveraged brings together these voices to take stock of what we have learned about the costs and causes of financial fragility and to offer a new canonical framework for understanding it. Their message: the origins of financial instability in modern economies run deeper than the technical debates around banking regulation, countercyclical capital buffers, or living wills for financial institutions. Leveraged offers a fundamentally new picture of how financial institutions and societies coexist, for better or worse. The essays here mark a new starting point for research in financial economics. As we muddle through the effects of a second financial crisis in this young century, Leveraged provides a road map and a research agenda for the future. "An authoritative guide to the new economics of our crisis-filled century. The 2008 financial crisis was a seismic event that laid bare how financial institutions' instabilities can have devastating effects on societies and economies. For a generation of economists who have risen to prominence since, the event has defined not only how they view financial instability, but financial markets more broadly. With these economists now representing the vanguard of the field and staffing the world's foremost economic institutions, their work constitutes a new canon of economic thought for the field and public policy. Leveraged brings together these vanguard voices to take stock of what we've learned about the costs and causes of financial fragility. Their message: the origins of financial instability in modern economies run deeper than the dry and technical debates around banking regulation, countercyclical capital buffers, or living wills for financial institutions. Financial crises are not black swans; they're a phenomenon endemic to capitalist economies. Over-optimism, neglected crash risks, or "bad beliefs" about risk and returns more generally, have emerged as an important explanation of recurring credit booms that pose such grave financial stability risks. The essays here mark a new starting point for research in financial economics. They provide a road map and a research agenda for the future. The new economics of debt and credit go to places that were off-limits to neoclassical finance before 2008. Today, as we muddle through the effects of a second financial crisis in this young century, Leveraged offers a sober, evolved approach to the economics we are only just discovering"-- Provided by publisher. Contents 6 Foreword by Richard Vague 8 Introduction: The New Economics of Debt and Financial Fragility | Moritz Schularick 10 Part I. Finance Unbound: The Rise of Finance and the Economy 24 1. How to Think about Finance | Atif Mian, Comment by Karen Dynan 26 2. Reconsidering the Costs and Benefits of Debt Booms for the Economy | Emil Verner, Comment by Holger Mueller 41 Part II. Risk-Taking: Incentives, Investors, Institutions 66 3. Are Bank CEOs to Blame? | Rüdiger Fahlenbrach, Comment by Samuel G. Hanson 68 4. A New Narrative of Investors, Subprime Lending, and the 2008 Crisis | Stefania Albanesi, Comment by Fernando Ferreira 88 5. Bank Capital before and after Financial Crises | Òscar Jordà, Björn Richter, Moritz Schularick, and Alan M. Taylor; Comment by Anna Kovner 125 Part III. Mispricing Risks: Credit Booms and Risk Premia 146 6. Beliefs and Risk-Taking | Alessia De Stefani and Kaspar Zimmermann, Comment by Yueran Ma 148 7. A New Approach to Measuring Banks’ Risk Exposure | Juliane Begenau, Comment by Nina Boyarchenko 174 8. Is Risk Mispriced in Credit Booms? | Tyler Muir 196 Part IV. Financial Crises: Reconsidering the Origins and Consequences 216 9. Historical Banking Crises: A New Database and a Reassessment of Their Incidence and Severity | Matthew Baron and Daniel Dieckelmann, Comment by Mark Carlson 218 10. Was the U.S. Great Depression a Credit Boom Gone Wrong? | Natacha Postel-Vinay, Comment by Eugene N. White 242 11. Sectoral Credit Booms and Financial Stability | Karsten Müller Comment by Orsola Costantini 279 Index 308 Introduction : the new economics of debt and financial fragility /Moritz Schularik --Part 1. Finance unbound : the rise of finance and the economy.How to think about finance /Atif Mian ; comment by Karen Dynan --Reconsidering the costs and benefits of debt booms for the economy /Emil Verner ; comment by Holger Mueller --Part 2. Risk-taking : incentives, investors, institutions.Are bank CEO's to blame? /Rüdiger Fahlenbrach ; comment by Sameul G. Hanson --A new narrative of investors, subprime lending, and the 2008 crisis /Stefania Albanesi ; comment by Fernando Ferreira --Bank capital before and after financial crises /Òscar Jordà, Björn Richter, Moritz Schularick, and Alan M. Taylor ; comment by Anna Kovner --Part 3. Mispricing risks : credit booms and risk premia.Beliefs and risk-taking /Alessia de Stefani and Kaspar Zimmermann ; comment by Yueran Ma --A new approach to measuring banks' risk exposure /Juliane Begenau ; comment by Nina Boyarchenko --Is risk mispriced in credit booms? /Tyler Muir --Part 4. Financial crises : reconsidering the origins and consequences.Historical banking crises : a new database and a reassessment of their incidence and severity /Matthew Baron and Daniel Dieckelmann ; comment by Mark Carlson --Was the U.S. Great Depression a credit boom gone wrong? /Natascha Postel-Vinah ; comment by Eugene N. White --Sectoral credit booms and financial stability /Kärsten Muller ; comment by Orsola Costantini La crisis económica de 2008 y el COVID-19 pusieron de manifiesto como las debilidades financieras pueden tener efectos devastadores en las sociedades y en las economías. En este libro se analiza lo que ha aprendido una nueva generación de economistas sobre los costes y causas de la fragilidad financiera y ofrece un marco para intentar entenderla