宏观经济学曼昆曼昆1

INTHISCHAPTER,YOUWILLLEARN:thefunctionsahealthyfinancialsystemperformsthecommonfeaturesoffinancialcrisesgovernmentpoliciestoalleviateorpreventcrises1BRAINSTORM

WhatthefinancialsystemdoesWhatfunctionsdoesthefinancialsystemperform?Taketwominutesandtrytothinkoftwoorthree,andwritethemdown.Then,we’llcompareanswers.2WHATTHEFINANCIALSYSTEMDOES

1.FinancingInvestmentThefinancialsystemhelpschannelfundsfromsavers—householdswithetheydonotneedtospendimmediately…toinvestors—firmsthatneedfundstofinanceinvestmentprojectsWHATTHEFINANCIALSYSTEMDOES

1.FinancingInvestmentFinancialsystem:theinstitutionsintheeconomythatfacilitatetheflowoffundsbetweensaversandinvestorsThefinancialsystemincludesfinancialmarkets,likethestockmarket,throughwhichhouseholdsdirectlyprovidefundsforinvestmentfinancialintermediaries,likebanksormutualfunds,throughwhichhouseholdsindirectlyprovidefundsforinvestmentWHATTHEFINANCIALSYSTEMDOES

1.FinancingInvestmentDebtfinance:sellingbondstoraisefundsforinvestmentAbondrepresentsaloanfromthebondholdertothefirm.Equityfinance:sellingstocktoraisefundsforinvestmentAshareofstockrepresentsanownershipclaimbytheshareholderinthefirm.WHATTHEFINANCIALSYSTEMDOES

1.FinancingInvestmentFinancialintermediariesacceptfundsfromsaversanddirectthemtoinvestors.Forexample,banksacceptdepositsfromhouseholdsandmakeloanstofirms.Otherexamples:mutualfunds,pensionfunds,andinsurancecompaniesWHATTHEFINANCIALSYSTEMDOES

2.SharingRiskManypeopleareriskaverse:

otherthingsequal,theydislikeuncertainty.Thefinancialsystemallowspeopletosharerisks:Investorscansharetheriskthattheirprojectswillfailwiththesaverswhoprovidethefunds.Saversmaybewillingtoaccepttheserisksfortheprospectofahigherreturnthantheycouldearnotherwise.WHATTHEFINANCIALSYSTEMDOES

2.SharingRiskManypeopleareriskaverse:

otherthingsequal,theydislikeuncertainty.Thefinancialsystemallowspeopletosharerisks:Saverscanreduceriskthroughdiversification:providingfundstomanydifferentinvestorswithuncorrelatedassets.Diversificationcanreduceidiosyncraticrisks,risksthatdifferacrossindividualbusinesses.Diversificationcannotreducesystematicrisks,whichaffectmost/allbusinesses.WHATTHEFINANCIALSYSTEMDOES

3.DealingwithAsymmetricInformationAsymmetricinformation:

whenonepartytoatransactionhasmoreinformationaboutitthantheotherpartyAdverseselection:

whenpeoplewithhiddenknowledgeaboutattributessortthemselvesinawaythatdisadvantagespeoplewithlessinformationExample:investorswhoknowtheirprojectsarelesslikelytosucceedaremoreeagertofinancetheprojectswithotherpeople’sfundsWHATTHEFINANCIALSYSTEMDOES

3.DealingwithAsymmetricInformationAsymmetricinformation:

whenonepartytoatransactionhasmoreinformationaboutitthantheotherpartyMoralhazard:arisesfromhiddenknowledgeaboutactions,occurswhenimperfectlymonitoredagentsactindishonestorinappropriateways.Example:entrepreneursinvestingotherpeople’smoneyarenotascarefulasiftheywereinvestingtheirownfundsWHATTHEFINANCIALSYSTEMDOES

3.DealingwithAsymmetricInformationThefinancialsystemhelpsmitigatetheeffectsofasymmetricinformation.Example:banksBanksaddressadverseselectionbyscreeningborrowersforadversehiddenattributesthatsaversmightnotdetect.Banksaddressmoralhazardbyrestrictinghowloanproceedsarespentorbymonitoringtheborrowers.WHATTHEFINANCIALSYSTEMDOES

4.FosteringEconomicGrowthIntheSolowmodel,thereisonetypeofcapital;intherealworld,therearemany.Firmswithlucrativeinvestmentprojectsarewillingtopayhigherinterestratestoattractfundsthanfirmswithlessdesirableprojects.Thefinancialsystemhelpschannelfundstoprojectswiththehighestexpectedreturnsrelativetotheirrisk.WHATTHEFINANCIALSYSTEMDOES

4.FosteringEconomicGrowthGovthelpsfacilitatethisfunctionbyprovidingqualitylegalinstitutions,e.g.

prosecutingfraudtoreducemoralhazardenforcingdisclosurerequirementstoreduceadverseselectionBRAINSTORM

FinancialsystemfailureSupposethefinancialsystemesunabletoperformthefunctionofchannelingfundsfromsaverstoborrowers.Taketwominutes,thinkoftwoorthreespecificconsequences,andwritethemdown.Then,we’llcompareanswers.14COMMONFEATURESOFFINANCIALCRISES

1.Asset-PriceBoomsandBustsFinancialcrisesoftenfollowaperiodofoptimismandaspeculativeasset-pricebubble.Eventually,optimismturnstopessimismandthebubblebursts,causingassetpricestodrop.Inthe2008–2009crisis,thecrucialassetwashousing:housepricessoareduntil2006,thendropped30%by2009.COMMONFEATURESOFFINANCIALCRISES

2.InsolvenciesatfinancialinstitutionsFallingassetpricescausedefaultsonbankloans.Sincebanksarehighlyleveraged,

defaultsgreatlyreducetheircapital,

increasingtheriskofinsolvencies.In2008–2009,manybanksheldmortgagesandassetsbackedbymortgages.Fallinghousepricessharplyincreasedmortgagedefaults,pushingmanyfinancialinstitutionstowardbankruptcy.COMMONFEATURESOFFINANCIALCRISES

3.FallingconfidenceInsolvenciesatsomebanksreduceconfidenceinothers,andindividualswithuninsureddepositswithdrawtheirfunds.Toreplacetheirshrinkingreserves,banksmustsellassets.Sellingbymanybankscausessteeppricedeclines—calledafiresale.In2008–2009,thecollapseofBearStearnsandLehmanBrothersreducedconfidenceinotherlargeinstitutions,manyofwhichwereinterdependent.FYI:TheTEDspreadTheTEDspreadmeasurestheperceivedcreditriskofbanks.Definition:TEDspread=

rateonthree-monthinterbankloans

–rateonthree-monthT-bills

(expressedinbasispoints)

TheTEDspreadisusuallybetween10and50basispoints.Inafinancialcrisis,fallingconfidenceinbankscausestheTEDspreadtorise…TheTEDspread,2003–2015basispointsCOMMONFEATURESOFFINANCIALCRISES

4.CreditcrunchFrequentdefaultsandinsolvenciesmakeithardforinvestorstogetloans—eventhosewithgoodcreditandlucrativeprojects.In2008–2009,bankssharplyreducedlendingtoconsumersforbuyinghomesandtobusinessesforexpandingoperationsorbuyinginventories.COMMONFEATURESOFFINANCIALCRISES

5.RecessionWithlesscreditavailable,consumerandbusinessspendingdeclines,reducingaggregatedemand.Result:outputfalls,unemploymentrises.In2008–2009,unemploymentroseabove10%andremainedveryhighformanymonthsafterthefinancialcrisis.COMMONFEATURESOFFINANCIALCRISES

6.AviciouscircleTherecessionreducesprofits,assetvalues,andhouseholdes,whichincreasesdefaults,bankruptcies,andstressonfinancialinstitutions.Thefinancialsystem’sproblemsandtheeconomy’sdownturnreinforceeachother.In2008–2009,theviciouscirclewasapparent,creatingfearstheeconomywouldspiraloutofcontrol.TheAnatomyofaFinancialCrisisFallingconfidenceinmanyfinancialinstitutionsAsset-pricebustInsol-vencies

atsomefinancialinstitutionsCreditcrunch(banksreducelending)Recession(fromfallingaggregatedemand)Viciouscircle

(recessionputsmorepressureonassetpricesandfinancialinstitutions)Whoshouldbeblamedforthe

financialcrisisof2008–2009?Possibleculpritsinclude:TheFederalReserveHomebuyersMortgagebrokersInvestmentbanksRatingagenciesRegulatorsGovernmentpolicymakersAllofthemlikelydeserveashareoftheblame.BRAINSTORM

GovernmentpoliciesWhatshouldthegovernmentdoifafinancialcrisisoccurs?Canthegovernmentpreventfinancialcrises?Taketwominutes.Trytothinkofaspecificpolicytoalleviateafinancialcrisisandanotherpolicytopreventfuturecrises.25POLICYRESPONSESTOACRISIS

1.ConventionalmonetarypolicyThecentralbankcanexpandthemoneysupplytolowerinterestratesandencouragespending.TheFedreducedthefederalfundsratetonearlyzeroby12/2008,yetthiswasinsufficient.

(RecalltheliquiditytrapfromChap.12.)POLICYRESPONSESTOACRISIS

2.ConventionalfiscalpolicyThegovernmentcanincreasespendingandcuttaxes.Fiscalpolicymakersenactedstimulusof$168billionin2008and$787billionin2009.Butthelargeandgrowinggovernmentdebtsharplylimitedfurtherstimulusmeasures.POLICYRESPONSESTOACRISIS

3.LenderoflastresortRunsonbankscancreatealiquiditycrisis,

inwhichsolventbankshaveinsufficientfunds

tosatisfydepositors’withdrawals.Thecentralbankcanmakedirectloanstothesebanks,actingasalenderoflastresort.In2008–2009,theFedactedaslenderoflastresorttomanybanksandtoshadowbanks,whichperformmanyofthesamefunctionsasbanksandwereexperiencingsimilarproblems.POLICYRESPONSESTOACRISIS

4.InjectionsofgovtfundsThegovtcanusepublicfundstopropupthefinancialsystem:Givefundstothosewhohaveexperiencedlosses(e.g.,FederalDepositInsurance)Makeriskyloans(e.g.,loanstoAIGin2008)Injectcapitalintoailinginstitutions,takinganownershipstake(e.g.,TARP)Usingpublicfundstopropupailinginstitutionsiscontroversialandmayincreasemoralhazard.POLICIESTOPREVENTCRISES

1.FocusingonshadowbanksShadowbanksengageinfinancialintermediationandincludeinvestmentbanks,hedgefunds,privateequityfirms,andinsurancecompanies.Theirdepositsarenotfederallyinsured,sotheyarenotheavilyregulatedliketraditionalbanksandcantakeonmuchmorerisk.Theirfailurescanhurtthebroadereconomy,somanypolicymakerssuggestlimitingtherisktheycantake,increasingcapitalrequirementsforthem,allowingmoregovtoversight.POLICIESTOPREVENTCRISES

2.RestrictingsizeInstitutionsdeemed“toobigtofail”haveamoralhazardproblem.Someproposalswouldlimitthesizeoffinancialinstitutionstoreducetheharmtheirfailureswouldcausetotherestofthefinancialsystem.Proposalsincludelimitingmergersandincreasingcapitalrequirementsforlargerbanks.POLICIESTOPREVENTCRISES

3.ReducingexcessiverisktakingTopreventfinancialfirmsfromfailing,someproposelimitsonexcessiverisktaking.Problem:defining“excessive”TheDodd-FrankActof2010includesthe

Volckerrule,whichprohibitscommercialbanksfrommakingcertaintypesofspeculativeinvestments.POLICIESTOPREVENTCRISES

4.MakingregulationworkbetterTheregulatoryapparatusoverseeingthefinancialsystemishighlyfragmented.Dodd-Frankandothermeasuresseektocoordinatethevariousregulatoryagenciesandimprovetheeffectivenessoffinancialindustryoversight.POLICIESTOPREVENTCRISES

5.TakingamacroviewofregulationTraditionally,financialregulationhasbeenmicroprudential,aimingtoreducetheriskofdistressinindividualfinancialinstitutions.Today,financialregulationisalsomacroprudential,aimingtoreducesystem-widedistresstoprotectagainstdeclinesinproductionandemployment.TheEuropeansovereigndebtcrisisDebtproblemsinGreece:Risinggovtdebt,revelationsthatGreecemayhavemisreporteditsfinancesinearlieryearsGreekbondsdowngraded,pricesfell,interestratesshotupasmarketsworriedthatGreecemightdefaultRepercussionsthroughoutEurope:ManyEuropeanbanksheldGreekbonds,whosefallingvaluespushedthemtowardbankruptcy.Policymakersworriedthatbankswouldfail,causingacreditcrunchandeconomicdownturn.TheEuropeansovereigndebtcrisisBailingoutGreece:TheECBandhealthiercountriesinEuropemadeloanstoGreecetopreventanimmediatedefault.TheloanscamewithconditionsthatGreeceenactausteritymeasurestoimproveitsfinances.Taxpayersincountriesprovidingthefundsresentedthebailouts.Greekcitizensresentedtheausteritymeasuresandriotingensued.Othercountrieswithproblems:ManyfearedaGreekdefaultwouldleadto