There have been more than a dozen financial crises in the world since 1980, including six in the United States alone. Major financial disruption was averted but only until the crisis of 2007-09. What are the common elements among these crises, what are the differences? In some instances, crises have brought about significant regulatory reform. Yet how is it that financial crises seem to recur with such frequency? And recur despite regulatory efforts to avoid them.
Using a mix of economic history, finance, and law-related materials we plan to address the following themes:
1) Are financial crises foreseeable or unforeseeable? Do they arise from processes internal to the financial sector (such as the “leverage cycle”) or from external events, such as changes in the political landscape that change the terms of financial globalization?
2) Are there more or less stable structures for the financial system? The financial system aims to match suppliers of capital (savers) and users of capital (business users and consumers). From a stability point of view, is such financial intermediation better done through financial institutions or through markets?
3) Is there an optimum size for financial institutions? Should certain financial market activities be combined (for efficiency and diversification) or separated?
4) Are we better off with rigorous schemes of crisis avoidance or efficient resolution mechanisms, if long periods of financial stability inevitably lead to increased leverage, asset price inflation and a resulting steeper crash? Perhaps we are better off by focusing attention on mopping up smaller, more frequent crashes?
5) Do recurrent crises flow from the political constraints on optimum regulation? There are two facets to this question. First, is the desire of incumbent political leaders to promote reelection chances by producing economic growth or greater home ownership, which favors expansionary credit policies. Second, is the firm-level competition within the financial sector to protect and expand rents.
6) The financial environment is driven by the interplay of legislation, regulation, governance and monetary policy. To what extent can independent central bank intervention through
monetary policy correct for legislative or regulatory debility?
7) Do the goals of differently tasked regulators conflict in a way that may undermine systemic stability? How does the disclosure focus of securities regulators fit with the safety and soundness goals of financial regulators, as evidenced for example in Bank of America and Merrill merger or the crisis era manipulation of Libor?
8) International coordination and its limits: do the concessions made to obtain sufficient national buy-in to achieve a widespread international regime (necessary to avoid free-riding) undermine the effectiveness of the international regulatory architecture? One example where this issue has arisen prominently in recent years is the zero risk-weighting on all OECD sovereign debt under the Basel accords.
Barbara and David Zalaznick Professor of Business
Patrick Bolton is the David Zalaznick Professor of Business. He joined Columbia Business School in July 2005. He received his PhD from the London School of Economics in 1986 and holds a BA in economics from the University of Cambridge and a BA in political science from the Institut d'Etudes Politiques de Paris. He began his career as an assistant professor at the University of...