Understanding Financial Crises: The Economics, Politics, and Greed of the Most Spectacular Bubbles and Crises of the Past Century

We are pleased to announce that A Critical History of Financial Crises has been included in CHOICE Magazine's Outstanding Academic Title list. Only the most outstanding works have been selected for their excellence in scholarship and presentation, the significance of their contribution to the field, and their value as important — often the first — treatment of their subject.For more information on CHOICE Magazine's Outstanding Academic Title list, please visit the following link: www.choice360.org/products/magazine /remove'While each financial crisis is unique and has its own special features, there are a lot of similarities in the dynamics leading to a crisis and also in their resolutions. Some of the financial crises are caused by the lack of appropriate regulation, but often the regulators were ignoring the signals of imminent crises, while serving implicitly or explicitly, the financial industry.In his book, Prof. Kedar-Levy is providing a fresh look at many famous financial crises around the globe, analysing their causes and effects. The special role of regulators is highlighted, including the'Capture Theory'in practice. This book is suitable for economist as well as for those interested in economic history, and for all those concerned with the stability of current international financial markets.'Professor Dan GalaiThe Hebrew University, Jerusalem Contents 8 Acknowledgements 10 Preface — Regulatory Capture 12 1. What are Bubbles and Financial Crises? 20 1.1 Introduction 20 1.2 A Conceptual Framework of Financial Crises 20 1.3 Bubbles and Models of Bubbles 22 1.3.1 Rational models: Symmetric information 24 1.3.2 Rational models: Asymmetric information 25 1.3.3 Behavioral models: Heterogeneous beliefs 25 1.3.4 Behavioral models: Limits of arbitrage 26 1.4 Implications of Crashing Bubbles 26 1.5 International Implications 28 1.6 Conclusion 29 Additional Reading 30 2. Key Properties of the Financial System and Financial Securities 32 2.1 Introduction 32 2.2 Key Players in a Free-Market Economy 32 2.3 Key Properties of Bonds 34 2.4 Key Properties of Stocks 36 2.5 Overview of the Financial System 41 Additional Reading 43 3. Commercial Banking and Banking Crises 44 3.1 Prologue 44 3.2 Commercial Banks and the ‘ Money Multiplier’ 44 3.3 Bank Runs 45 3.4 Central Banks as Lenders of Last Resort 46 3.5 From Bank Runs to Banking Crises 48 3.6 Basel Accords for Banking Regulation 49 3.7 Epilogue 51 Additional Reading 52 4. The Roaring Twenties and the US Bubble of 1929 54 4.1 From Recession to Expansion 54 4.2 Back into the Stock Market 56 4.3 The ‘New Economy’ of the Roaring Twenties 57 4.4 The Crash 59 Additional Reading 61 5. The ‘Great Depression’ in the US 62 5.1 Introduction 62 5.2 Rage 62 5.3 New Rules 64 5.4 The Political System 65 5.5 The Gold Standard 66 5.6 Economic Policy 67 5.7 Global Effects 68 5.8 Could the Government Do Better? 69 5.9 The Dust Bowl 70 Additional Reading 72 6. The Crisis of Confidence in Corporate America, 2001–2004 74 6.1 Introduction 74 6.2 Background 75 6.3 Destructive Symbiosis between Managers, Politiciansand Auditors 75 6.4 The Politics 79 6.5 The Price 83 6.6 Legal Response and the Need for Better Regulations 86 6.7 Was the Enron Regulator Captured? 87 6.8 Social Response 88 Additional Reading 88 7. The Internet Bubble 90 7.1 A ‘New Economy’, Again 90 7.2 Vague Valuations 91 7.3 Financial Analysts: Roles and Incentives 93 7.4 Stock Options 96 7.5 The Mania 99 7.6 Where Were the Regulators? 99 Additional Reading 101 8. When Banks Manipulate their Stock Prices: Israel’s Systemic Banking Crisis 102 8.1 Background 102 8.2 An Economy in Transition 103 8.3 The Motivation and Practice 104 8.4 The Macroeconomic Environment 106 8.5 The Crash Unfolds 108 8.6 Ineffective Regulation 110 8.7 The End 113 Additional Reading 114 9. The Tequila Crisis and its Hangover 116 9.1 Introduction 116 9.2 A Brief Explanation of International Accounts 116 9.3 Mexico 118 9.4 The Price of a Fixed Exchange Rate Policy 120 9.5 The Tequila Crisis Unfolds 122 9.6 Argentina’s Bankruptcies 124 Additional Reading 128 10. Japan and the East Asian Tigers 130 10.1 Japan: From Feudal Agriculture to a Global Industry Leader 130 10.2 Overheating with Easy Lending 133 10.3 The Burst of the Bubble and its Cost 135 10.4 The East Asian Tigers 138 10.5 The Lessons 142 10.5.1 Financial liberalization 142 10.5.2 Hedging and fl exibility 143 10.5.3 Speculators on the guard 143 Additional Reading 144 11. The US Real Estate Bubble 146 11.1 Background 146 11.2 Affordable Housing 147 11.3 Securitization is Born 149 11.4 NINJA Loans 154 Additional Reading 156 12. Incentives, Regulatory Capture and Collapse 158 12.1 Introduction 158 12.2 The Role of the Fed 158 12.3 Regulatory capture and the Gramm–Leach–Bliley Act 163 12.4 Private-Label MBS 166 12.5 Incentives 168 12.6 The Role of Hybrid Loans 170 12.7 The Crash Unfolds 171 12.8 Should the Government Have Stepped In? 172 12.9 Conclusions of the Inquiry Commission 174 12.10 Were th e Regulators Captured by the Industry? 175 Additional Reading 176 13. Shadow Banking, the Collapse of Investment Banking and the Rescue of AIG 178 13.1 Introduction 178 13.2 The Increasing Size and Complexity of the Financial System 178 13.3 The Shadow Banking System 179 13.4 Money Market Funds and Repos 180 13.5 Unclear Boundaries 182 13.6 Bear Stearns and BNP Paribas 182 13.7 Lehman Brothers and Merrill Lynch 184 13.8 AIG 185 Additional Reading 188 14. New Regulations 190 14.1 The US Financial Crisis Inquiry Commission 190 14.2 The Dodd–Frank Act 191 14.3 Criticism and Alternatives 192 14.4 Executive Pay 194 14.5 About Ideology 195 Additional Reading 195 15. Global Implications of the Credit Crisis 198 15.1 Introduction 198 15.2 Global Linkages 198 15.3 Financial Fragility 200 15.4 Dubai 202 15.5 Iceland 203 Additional Reading 204 16. Regulatory Capture and Corruption vs. Integrity and Stability 206 16.1 Introduction 206 16.2 Regulatory Capture, Loss of Integrity and Loss of Value through Financial Crises 207 16.3 Executive Pay 212 16.4 Incentives 214 16.5 Lobbying, Politicians, and Regulation 215 Additional Reading 218 Bibliography 220 Index 226 The Book Explains How The Economic Environment Changed Throughout 10 Of The Most Spectacular Financial Crises Of The Past Century. On The One Hand, It Shows That The Lack Of Effective Regulation, Relevant Data, And Adequate Understanding Of The Economic Environment Were Among The Facilitators Of The Crises. On The Other Hand, It Highlights The Role That Ill-incentivized Bankers And Accountants, Biased Politicians, Euphoric Investors, Speculators, And Corrupt Managers Played In The Evolution Of Bubbles And Crises.--from Publisher Description. What Are Bubbles And Financial Crises? -- Key Properties Of The Financial System And Financial Securities -- Commercial Banking And Banking Crises -- The Roaring Twenties And The Us Bubble Of 1929 -- The 'great Depression' In The Us -- The Crisis Of Confidence In Corporate America, 2001-2004 -- The Internet Bubble -- When Banks Manipulate Their Stock Prices: Israel's Systemic Banking Crisis -- The Tequila Crisis And Its Hangover -- Japan And The East Asian Tigers -- The Us Real Estate Bubble -- Incentives, Regulatory Capture And Collapse -- Shadow Banking, The Collapse Of Investment Banking And The Rescue Of Aig -- New Regulations -- Global Implications Of The Credit Crisis -- Regulatory Capture And Corruption Vs. Integrity And Stability. Haim Kedar-levy, Ben-gurion University Of The Negev, Israel. Includes Bibliographical References (pages 201-205) And Index. "While each financial crisis is unique and has its own special features, there are a lot of similarities in the dynamics leading to a crisis and also in their resolutions. Some of the financial crises are caused by the lack of appropriate regulation, but often the regulators were ignoring the signals of imminent crises, while serving implicitly or explicitly, the financial industry. In his book, Prof. Kedar-Levy is providing a fresh look at many famous financial crises around the globe, analysing their causes and effects. The special role of regulators is highlighted, including the "Capture Theory" in practice. This book is suitable for economist as well as for those interested in economic history, and for all those concerned with the stability of current international financial markets." Professor Dan Galai The Hebrew University, Jerusalem "While each financial crisis is unique and has its own special features, there are a lot of similarities in the dynamics leading to a crisis and also in their resolutions. Some of the financial crises are caused by the lack of appropriate regulation, but often the regulators were ignoring the signals of imminent crises, while serving implicitly or explicitly, the financial industry. In his book, Prof. Kedar-Levy is providing a fresh look at many famous financial crises around the globe, analysing their causes and effects. The special role of regulators is highlighted, including the "Capture Theory" in practice. This book is suitable for economist as well as for those interested in economic history, and for all those concerned with the stability of current international financial markets."-- Provided by Publisher