This paper summarizes and explains the main events of the liquidity and credit crunch in 2007-08. Starting with the trends leading up to the crisis, I explain how these events unfolded and how four different amplification mechanisms magnified losses in the mortgage market into large dislocations and turmoil in financial markets.

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Deciphering the Liquidity and Credit Crunch 2007-08

Using various methods, the size of the shadow economy in 76 developing, transition, and OECD countries is estimated. Average size varies from 12 percent of GDP for OECD countries, to 23 percent for transition countries and 39 percent for developing countries. Increasing taxation and social security contributions combined with rising state regulations are driving forces for the increase of the shadow economy, especially in OECD countries. According to some findings, corruption has a positive impact on the size of the shadow economy, and a growing shadow economy has a negative effect on official GDP growth.

/pdf/shadow-economies-size-causes-and-consequences-1rnohp2zuz.pdf

Shadow Economies: Size, Causes, and Consequences

The crisis of 2008-09 has focused attention on money and credit fluctuations, financial crises, and policy responses. In this paper we study the behavior of money, credit, and macroeconomic indicators over the long run based on a newly constructed historical dataset for 12 developed countries over the years 1870-2008, utilizing the data to study rare events associated with financial crisis episodes. We present new evidence that leverage in the financial sector has increased strongly in the second half of the twentieth century as shown by a decoupling of money and credit aggregates, and we also find a decline in safe assets on banks' balance sheets. We also show for the first time how monetary policy responses to financial crises have been more aggressive post-1945, but how despite these policies the output costs of crises have remained large. Importantly, we can also show that credit growth is a powerful predictor of financial crises, suggesting that such crises are

Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870-2008

Over the last thirty years, a new paradigm in banking theory has overturned economists' traditional vision of the banking sector. The asymmetric information model, extremely powerful in many areas of economic theory, has proven useful in banking theory both for explaining the role of banks in the economy and for pointing out structural weaknesses in the banking sector that may justify government intervention. In the past, banking courses in most doctoral programs in economics, business, or finance focused either on management or monetary issues and their macroeconomic consequences; a microeconomic theory of banking did not exist because the Arrow-Debreu general equilibrium model of complete contingent markets (the standard reference at the time) was unable to explain the role of banks in the economy. This text provides students with a guide to the microeconomic theory of banking that has emerged since then, examining the main issues and offering the necessary tools for understanding how they have been modeled. This second edition covers the recent dramatic developments in academic research on the microeconomics of banking, with a focus on four important topics: the theory of two-sided markets and its implications for the payment card industry; "non-price competition" and its effect on the competition-stability tradeoff and the entry of new banks; the transmission of monetary policy and the effect on the functioning of the credit market of capital requirements for banks; and the theoretical foundations of banking regulation, which have been clarified, although recent developments in risk modeling have not yet led to a significant parallel development of economic modeling. Praise for the first edition:"The book is a major contribution to the literature on the theory of bankingand intermediation. It brings together and synthesizes a broad range ofmaterial in an accessible way. I recommend it to all serious scholars andstudents of the subject. The authors are to be congratulated on a superbachievement." -- Franklin Allen, Nippon Life Professor of Finance and Economics, WhartonSchool, University of Pennsylvania "This book provides the first comprehensive treatment of the microeconomicsof banking. It gives an impressive synthesis of an enormous body ofresearch developed over the last twenty years. It is clearly written and apleasure to read. What I found particularly useful is the great effort thatXavier Freixas and Jean-Charles Rochet have taken to systematicallyintegrate the theory of financial intermediation into classicalmicroeconomics and finance theory. This book is likely to become essentialreading for all graduate students in economics, business, and finance." -- Patrick Bolton, Barbara and David Zalaznick Professor of Business, Columbia University Graduate School of Business "The authors have provided an extremely thorough and up-to-date survey ofmicroeconomic theories of financial intermediation. This work manages to beboth rigorous and pleasant to read. Such a book was long overdue and shouldbe required reading for anybody interested in the economics of banking andfinance." -- Mathias Dewatripont, Professor of Economics, ECARES, Universit

Microeconomics of banking

http://deepblue.lib.umich.edu/bitstream/handle/2027.42/39681/wp297.pdf?sequence=3

Corporate Governance in the Asian Financial Crisis

Landscape of International Banking and Financial Crises Causes and Conditions for Cross-Border Instability Transmission and Threats to Stability Prudential Supervision Government Safety Net Insolvency Resolution Where to from Here: Policy Panel.

International financial instability : global banking and national regulation

Recently, the bank regulatory agencies have adopted capital forbearance programs to permit some troubled agriculture and energy banks to operate temporarily with capital levels below the regulatory minimum requirement. In a world with federal deposit insurance and a lender of last resort, bank capital is no longer viewed by all depositors as the primary protector of their funds. Thus, they reduce their market discipline. Bank owners/ managers are likely to respond by increasing their risk exposure in an attempt to regain profitability. If they win, they keep all the gains; if they lose, the losses are passed on to the Federal Deposit Insurance Corporation (FDIC). A preferred policy is to require these banks to raise additional capital at this time or to be sold. Capital forbearance is forbearance of incumbent bank management/owners, not of bank customers.

Bank capital forbearance and public policy

The diminishing role of commercial banking in the U.S. economy

Introduction 1. New Perspectives on Asset Price Bubbles: An Overview Douglas D. Evanoff, George G. Kaufman and A.G. Malliaris Bubbles: Theory and Evidence 2. Churning Bubbles Franklin Allen and Gary Gorton. Seminal research paper: The Review of Economic Studies, Volume 60 (1993). 3. Rethinking Theoretical Models of Bubbles: Reflections Inspired by the Financial Crisis and the Allen and Gorton's Paper on Churning Bubbles Gadi Barlevy Consequences of Bubbles Bursting 4. The Japanese Banking Crisis: Where Did it Come From and How Will it End? Takeo Hoshi and Anil K. Kashyap. Seminal research paper: NBER Macroeconomics Annual 1999, vol 14 (2000). 5. The Impact of the International Financial Crisis on Asia and the Pacific: Highlighting Monetary Policy Challenges from an Asset Price Bubble Perspective Andrew Filardo Bubbles and Monetary Policy 6. Monetary Policy and Asset Price Volatility Ben Bernanke and Mark Gertler. Seminal research paper: Economic Review, Federal Reserve Bank of Kansas City (1999). 7. Monetary Policy and Asset price Volatility: Should We Refill the Bernanke-Gertler Prescription? Kenneth N. Kuttner Bubbles and Macroprudential Regulation 8. Towards a Macroprudential Framework for Financial Supervision and Regulation? http://www.bis.org/publ/work128.pdf Claudio Borio. Seminal research paper: CESifo Economic Studies, Volume 49 (2003). 9. Bank Liquidity and Bubbles: Why Central Banks Should Lean Against Liquidity Viral V. Acharya and Hassan Naqvi Bubbles: Behavioral Explanations 10. Overconfidence and Speculative Bubbles Jose A. Scheinkman and Wei Xiong. Seminal research paper: Journal of Political Economy, Volume 111 (2003). 11. Asset Bubbles: Insights from Behavioral Finance Werner De Bondt Bubbles: Keynote Presentations 12. An Old Perspective on Asset Price Bubbles Policy William Poole 13. Struggling to Escape From 'Assumption 14' Benjamin M. Friedman New Ideas on Asset Price Bubbles 14. Monetary Policy and Stock Market Booms Lawrence J. Christiano, Cosmin Ilut, Roberto Motto, and Massimo Rostagno 15. Leverage and Bubbles: The Need to Manage the Leverage Cycle John Geanakoplos Asset Bubbles, Central Banks and Investments 16. Asset Price Bubbles and Central Bank Policies: The Crash of the Jackson Hole Consensus A. G. Malliaris 17. Do Bubbles Lead to Overinvestment? A Revealed Preference Approach Robert Chirinko and Huntley Schaller

/pdf/new-perspectives-on-asset-price-bubbles-theory-evidence-and-38y1lkt1fu.pdf

George G. Kaufman

Papers

International financial instability : global banking and national regulation

Bank capital forbearance and public policy

The diminishing role of commercial banking in the U.S. economy

New Perspectives on Asset Price Bubbles: Theory, Evidence and Policy

Deposit insurance reform: a functional approach