FIN 254f(2): Financial Manias and Crises

Spring 2010

Instructor

TA

Times:

Course Description

This course will analyze the dynamics of financial markets of all forms, and their impact on macro economic performance. It will be a quick summary (1 module) of what we know about bubbles, crashes, their causes and consequences. Particular attention will be paid to behavioral explanations. While the global crisis of 2008-2009 will be a major topic, it is put into a broader historical perspective that analyzes events and data from the last 300 years of history. The course will also examine the macro economic implications of financial crises by considering the mechanisms that allow financial disturbances to spill over into a broader macroeconomic context. This class is designed primarily for IBS masters students (MA, MBA, MSF), but it may be interesting for some IBS Ph.D. students as well. (Note: This course will be required for IBS Ph.D. students wishing to take the finance field exam. For these students there will be several additional readings covering detailed theories of crisis dynamics.)

At the end of the class students should come away with a broader historical and global perspective on the current financial world in which we live. Though students wont have a definite answer as to "what caused the crisis" they should come away with better tools to interpret business and policy decisions, and to understand crises in their future.

Prerequisites

FIN201, or a basic knowledge of finance is essential and ECON201, Global Economic Environment, are required. ECON202, Applied International Macroeconomics, is also a useful background for the class.

Required Readings:

  1. Kindleberger and Aliber, Manias, Panics, and Crashes, fifth edition, Wiley.
  2. Shiller, Irrational Exuberance , second edition, Princeton.
  3. Nofsingner, The Psychology of Investing , third edition, Wiley.
  4. Reinhart and Rogoff, This Time is Different: Eight Centuries of Financial Folly, Princeton.
  5. Reinhart, This time is different chartbook: Country histories on debt, default, and financial crises, NBER WP 15815, 2010.

Related, but far from required, readings

  1. Minsky, Stabilizing An Unstable Economy , McGraw Hill.
  2. Mackay, Extraordinary Popular Delusions and the Madness of Crowds , Wiley, 1996 (originally 1841).

Grading

Grades will be based on problem sets (33%), a midterm exam (33%), and final exam (33%). The final exam is scheduled for the final exam block on Wednesday, May 12, 1:30-4:30pm, in Pollack 1.

Academic Honesty

You are expected to be familiar with and to follow the University's policies on academic integrity (see http://www.brandeis.edu/global/current_academic_integrity.php). Instances of alleged dishonesty will be forwarded to the Office of Campus Life for possible referral to the Student Judicial System. Potential sanctions include failure in the course and suspension from the University.

Disability Statement

IF YOU ARE A STUDENT WITH A DOCUMENTED DISABILITY ON RECORD AT BRANDEIS UNIVERSITY AND YOU WISH TO HAVE A REASONABLE ACCOMMODATION MADE FOR YOU IN THIS CLASS, PLEASE SEE ME IMMEDIATELY. PLEASE KEEP IN MIND THAT REASONABLE ACCOMMODATIONS ARE NOT PROVIDED RETROACTIVELY.

Course Outline

  1. Some bubble theories and taxonomy
    1. Bubbles: Definitions and mechanisms
      Kindleberger and Aliber, chapter 2-3.
    2. Types of bubbles
      Reinhardt/Rogoff chapter 1.
    3. The contribution of credit
      Kindelberger chapter 4, Reinhart and Rogoff, chapter 2
  2. History
    1. Old classic bubbles
      Kindleberger and Aliber, chapter 1,6-7.
      Garber, Famous First Bubbles, Journal of Economic Perspectives , 1990:4, 35-54.
      Frehen, Goetzmann, and Rouwenhorst, New Evidence on the First Financial Bubble, NBER wp 15332, 2009.
      (B) Garber, P., Tulipmania, Journal of Political Economy , 1989:97, 535-560.
      (B) Temin and Voth, Riding the South Sea Bubble, American Economic Review, 2004:4, 1654-1668.
    2. Banking crises and middle history
      Reinhart and Rogoff, chapters 10-12
      Allen and Gale, Understanding Financial Crises, chapter 1.
    3. Stock markets and an introduction to international contagion
      Shiller, chapter 1.
      Kindleberger and Aliber, chapter 8.
      Cutler, Poterba, and Summers, What moves stock prices?, Journal of Portfolio Management 1989:4-12.
    4. Real estate
      Shiller, chapter 2.
    5. History, stories, and amplification mechanisms
      Shiller, chapter 3-7.
    6. Macro connections
      Claessens, Kose, and Terrones, What happens during recessions, crunches and busts, IMF working paper, 08/274.
      (B) Gorton, Banking panics and business cycles, Oxford Economic Papers, 40, 751-781.
  3. Psychological foundations
    Shiller, chapter 8-9.
    Nofsinger, chapters 1, 2-5.
  4. Bubbles in the laboratory
    Porter and Smith, Stock market bubbles in the laboratory, Journal of Behavioral Finance , 2003: 4, pp 7-20.
  5. Crisis of 2008-2009, descriptions and historical perspectives
    *Reinhart and Rogoff 13-14.
    (B) Acharaya and Richardson, editors, Restoring Financial Stability, chapter 1, Wiley, 2009.
    Brunnermeier, Deciphering the 2007-2008 liquidity and credit crunch, Journal of Economic Perspectives, 23, 77-100.
    Gorton, Slapped in the Face by the invisible hand: Banking and the Panic of 2007.
    *Gorton, Questions and answers about the financial crisis, NBER working paper 15787, 2010.
    (B) Adrian and Shin, The Shadow Banking System: Implications for financial regulation, Federal Reserve Board of New York, Staff Reports, 2009.
    *Jagannathan, Kapoor, and Schaumburg, Why are we in a recession? The financial crisis is the symptom not the disease!, NBER working paper 15404, 2009.
    *Gjerstad and Smith, From Bubble to Depression, WSJ, April 6, 2009.
    *Greenspan, The Crisis, 2010. (B) Acharya, Cooley, Richardson, and Walter, Manufacturing tail risk: A perspective on the financial crisis of 2007-09, 2010, NYU working paper.
  6. Contagion and networks
    Reinhart and Rogoff, 15-16. Shiller, 8.
    Nofsinger, chapter 8.
    Haldane, Rethinking the financial network, Bank of England, 2009.
  7. Simulating financial crises: An introduction to agent-based models