Think of it as a picture guide to the ongoing earthquake in the world of high finance. Through charts, graphs, and tables, we will try to understand the dimensions of the current financial crisis--its origins and causes, its likely consequences, its potential remedies.
In seeking to understand the crisis, we need to begin with the credit mechanism. We are living through the bust of one of the greatest credit cycles of all financial history. In order get a handle on the seriousness of the bust, we must register the mania that fed the boom.
I look first at some measures indicative of the financial turmoil. For those unfamiliar with the financial markets, this provides a birds-eye view of the most important indicators, together with links for fresh updates.
The next three sections deal with the causes of the crisis, in which we examine the role of the housing boom and bust, the general growth of credit market debt, and the explosion in derivatives. The general pitch here is that the crisis has arisen above all from the extremities of debt and leverage that built up in the financial system over a long period.
Then it’s on to a consideration of consequences and remedies. The basic question--how much insolvency exists within the financial system?--is vital in assessing the wisdom of various bailouts and rescues, the opportunity costs associated with the government-mandated maintenance of the "FIRE" sector (Financials, Insurance, Real Estate), and how the global imbalances that have marked the last fifteen years are likely to change.
I conclude with some lessons and a collection of paper topics for interested students to consider.
The presentation is generally pitched to the intelligent undergraduate who doesn't know much but is eager to learn. Though prepared for anyone who believes, with me, that a chart is worth a thousand words, I put it together with my students primarily in mind. It began as a 25 minute presentation at Colorado College, then grew.
The whole financial crisis now ongoing must appear as fundamentally bewildering to young people, they who just assumed that their parents' generation knew what it was doing. Alas, no. Understanding what is going on is itself very difficult; finding the right answers is a huge challenge. These are notes and fragments to further that undertaking.
There are two ways of navigating this site: through the "Labels" section, which presents each chapter in an orderly fashion, or through the Table of Contents below.
Private Credit and Public Debt in Financial Crises
57 minutes ago