The course studies the history of financial crises and how crises shape financial evolution. What is a crisis? The word translates from the Greek as “moment of decision.” What are these decisions about? What kinds of turmoil do financial crises entail, and what kinds of decisions result from that turmoil?
We begin by categorizing financial crises. Important aspects that differentiate crises revolve around the extent to which the crisis reflects (1) default risk on sovereign debt, (2) an exchange rate collapse, (3) private sector insolvencies and losses to bank creditors, and (4) stock market or real estate asset price crashes. So called “twin crises” combine private sector insolvencies with exchange rate collapses. Other combinations also tend to occur together (sovereign defaults and exchange rate collapses). What causes crises, and why do some aspects of financial crises tend to coincide? Different frameworks for understanding crises continue to compete in the academic literature. These will be defined and their theoretical implications will be compared in light of the history of crises.
Crises reveal weaknesses in structure apparent through seismic shifts in risk and liquidity, which should be distinguished from the kinds of continuous risks that are modeled and priced using financial theories of risk and well-behaved statistical distribution functions. Crises tend to be times of learning, both about risks that were priced and about risks that have not been priced in advance.
Crises produce changes in the rules that govern financial systems, because of learning about risk, and because crises shift the interests and powers of various parties who seek changes in financial rules and structure to reallocate the “property rights” of finance (the rules that govern financial contracts – e.g., creditors’ rights and shareholders’ rights – and also determine who has the right to do what within the financial system). The evolution of financial systems’ rules can be written largely as a history of invention, crisis, and response, and that history has to be written not just as a pursuit of “progress” and “efficiency” but as a pursuit of interest within a particular political-economic context.
Because the institutions of the financial system evolve, as does our conception of risk, as crises unfold, the subject of financial crises and financial system evolution is best approached chronologically, although it is also useful to group crises according to their type within that chronological analysis. That purpose explains the sequence and grouping of material in the syllabus.
Henry Kaufman Professor of Financial Institutions
Charles W. Calomiris is the Henry Kaufman Professor of Financial Institutions at Columbia Business School, the Director of Columbia Business School’s Program for Financial Studies and of the PFS Initiative on Finance and Growth in Emerging Markets, and a professor at Columbia’s School of International and Public Affairs. His research spans the areas of banking...