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

The causes of the Great Financial Crisis (GFC) of 2007–2010 are many and varied. Indeed, the crisis may be viewed as the product of a perfect storm. This paper identifies the major culprits or sinners of the US crisis and enumerates their more important sins. The culprits include central bankers, commercial and investment bankers, credit rating agencies, financial engineers, the government, investors, mortgage borrowers, mortgage brokers, and prudential bank regulators. Among the numerous sins committed by these sinners, the role of the government in encouraging and subsidizing risky home mortgages and the poor performance of the prudential regulators in adequately enforcing the in-place rules are of particular concern. The regulators were poor agents for their healthy bank and taxpayer principals. It follows that prevention of future crisis requires, among other things, the development of better incentives to motivate the regulators to be more faithful to both the letter and the spirit of the legislative intent of Congress in enacting the legislation requiring the regulations.

The Great Financial Crisis of 2007–2010: The Sinners and their Sins

In his paper, John H. Kareken (in this issue) reviews the development of federal bank regulation in the United States and evaluates the effectiveness of the current regulatory structure. He concludes pessimistically that "present-day federal bank regulatory policy cannot (should not) be counted on to keep the banking industry sufficiently safe and sound.... Yet ... there is no obvious alternative to the policy of the present" (p. 47). To Kareken, the most appealing alternative is to split banks into two separate businesses, one offering payments services (transaction deposits) and restricted to 100% reserves in cash or Treasury securities (i.e., a money market fund) and the other offering nontransaction deposits and permitted wider investment opportunities. This idea, of course, goes back at least to the Peel Act of the mid1800s. My reading of the effectiveness of bank regulation and how it can be improved is quite different. In no way do I share Kareken's "despair." To a large extent, our different outlooks reflect differences in our answers to the questions of how important are bank runs and individual bank failures and how stable is the banking system? Although he expresses some doubts, Kareken does not question and implicitly accepts the generally held view that bank failures are more important than the failures of other firms, both because they offer liabilities that serve as money and because they may spread from bank to bank through the banking system. In addition, he assumes that the banking system as a whole is unstable. In contrast, both theory and empirical evidence lead me to conclude that, except in instances of man-made policy errors, (1) individual bank runs and failures are generally not much more impor-

Federal Bank Regulatory Policy: Comment on Kareken

Cross-border banking, while having the potential for a more efficient financial sector, also creates potential challenges for bank supervisors and regulators. It requires cooperation by regulatory authorities across jurisdictions and a clear delineation of authority and responsibility. That delineation is typically not present and regulatory authorities often have significantly different incentives to respond when cross-border-active banks encounter difficulties. Most of these issues have only begun to be seriously evaluated. This volume, one of the first attempts to address these issues, brings together experts and regulators from different countries. The wide range of topics discussed include: the current landscape of cross-border bank activity, the resulting competitive implications, emerging challenges for prudential regulation, safety net concerns, failure resolution issues, and the potential future evolution of international banking. This book has been selected for coverage in: • Index to Social Sciences & Humanities Proceedings® (ISSHP® / ISI Proceedings) • Index to Social Sciences & Humanities Proceedings (ISSHP CDROM version/ISI Proceedings)

'Preface to' Cross-Border Banking: Regulatory Challenges

This study analyzed data for municipal revenue bond issues sold in 1979 to identify the impact of commercial bank eligibility on the interest cost to the issuing state or local government. The empirical evidence developed suggests that commercial bank eligibility had no statistically significant effect on the interest cost of municipal revenue bonds sold competitively or by neogotiation, when other factors explaining the interest cost are taken into account properly. Nor did bank eligibility increase the power of the model to explain the interest cost of the bono issues. The theoretical and empirical weaknesses of some earlier studies that report opposite findings are analyzed.

George G. Kaufman

Papers

The Great Financial Crisis of 2007–2010: The Sinners and their Sins

Federal Bank Regulatory Policy: Comment on Kareken

'Preface to' Cross-Border Banking: Regulatory Challenges

Interest rate effects of commercial bank underwriting of municipal revenue bonds

The fed's post -october 1979 technical operating procedures under lagged reserve requirements: reduced ability to control money