From the 2007 Clarendon Lectures in Finance:

What causes a financial crisis? Can financial crises be anticipated or even avoided? What can be done to lessen their impact? Should governments and international institutions intervene? Or should financial crises be left to run their course? In the aftermath of the recent Asian financial crisis, many blamed international institutions, corruption, governments, and flawed macro and microeconomic policies not only for causing the crisis but also unnecessarily lengthening and deepening it. Based on ten years of research, the authors develop a theoretical approach to analyzing financial crises. Beginning with a review of the history of financial crises and providing readers with the basic economic tools needed to understand the literature, the authors construct a series of increasingly sophisticated models. Throughout, the authors guide the reader through the existing theoretical and empirical literature while also building on their own theoretical approach. The text presents the modern theory of intermediation, introduces asset markets and the causes of asset price volatility, and discusses the interaction of banks and markets. The book also deals with more specialized topics, including optimal financial regulation, bubbles, and financial contagion.

Table of Contents:

1. History and institutions
2. Time, uncertainty and liquidity
3. Intermediation
4. Asset markets
5. Financial fragility
6. Intermediation and markets
7. Optimal regulation
8. Money and the prices
9. Bubbles and crises
10. Contagion

See also, from the authors, An Introduction to Financial Crises, a freely available working paper on the subject; more here.

Understanding Financial Crises

Our annual snapshot of the emerging shape of business.

The HBR List: Breakthrough Ideas for 2008

Selling out?

As big pharmas fall over each other to proclaim themselves the 'partner of choice' for biotechs, there are still some lessons the younger sibling can learn.

Advice for partnering with pharma

Where credit is easy, and the consequences of non-repayment are not too drastic, households can maintain consumption for long periods even when their income is falling. So, the political resistance to pro-rich policies is much less sharp. The massive increase in income inequality in the US since 1970 has coincided with an equally massive boom in consumer credit.

The obvious question is whether this political equilibrium can survive. We’ve already seen a tightening of bankruptcy laws in the US and a big shift away from fixed-rate loans. Almost certainly, in the wake of the current debacle, lenders will act to protect themselves from jingle mail by lending lower proportions of house value and demanding additional security.

A million foreclosures

The US economy is slowing down, but the long-term trends for the country are more favourable than many think. There has also been a sharp improvement in many of America's social pathologies, such as violent crime and drug abuse

America still works

Moo. Corn. Moo Corn. (So sorry about the rainforests!)

History records that previous commodity booms were not followed by mass starvation, resource wars and the end of civilization. John Atkin is out to make sure it doesn't happen again.

An agricultural zoologist by training, he serves as chief operating officer for crop protection at Switzerland's Syngenta, a competitor to the U.S. giant Monsanto in the controversial business of agricultural technology.

Of the recent surge in prices for all manner of foodstuffs, he says don't blame biofuels. Coffee and frozen orange juice are up, and they don't go into your gas tank or compete for land with ethanol-related crops. Iron ore, copper and most nonfarm commodities are up too. And whatever the errors of Alan Greenspan and Ben Bernanke, the biggest factor may be a simple failure of optimism about the global economy. Every CEO's mental map now includes India and China, yet somehow the whole spectrum of natural resources producers failed to invest sufficiently to meet the demand of several hundred million new consumers.

Mr. Atkin cites a United Nations forecast that, by 2030, food production will have to have increase 50%, partly to feed a bigger world population and partly to supply the richer, more varied diets demanded by the newly affluent of the developing world.

Future Farmer

…a total of 2,203,295 foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 1,285,873 properties nationwide during the year, up 75 percent from 2006. The report also shows that more than 1 percent of all U.S. households were in some stage of foreclosure during the year, up from 0.58 percent in 2006.
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A total of 215,749 foreclosure filings were reported in December, up 97 percent from December 2006 and bringing the fourth-quarter total to 642,150 filings on 527,740 properties — up 1 percent from the previous quarter and up 86 percent from the fourth quarter of 2006.

US Foreclosure Activity Increases 75 Percent In 2007

This paper is a snapshot of the actions lenders took to assist borrowers in the third quarter of 2007, including loan modifications, repayment plans, deed in lieu transactions and short sales. More importantly, however, it examines the extent of these other circumstances so as to put the degree of assistance to borrowers into some sort of context. It looks at the number of foreclosures attributable to borrowers who do not occupy the properties, bor- rowers who cannot be located or won’t respond to lenders and borrowers who have already failed a previous repayment plan. It finds that, during the third quarter the approximately 54 thousand loan modifications done and 183 thousand repayment plans put into place exceeded the number of foreclosures started, excluding those cases where the borrower was an investor/speculator, where the borrower could not be located or would not respond to mortgage servicers, and when the borrower failed to perform under a plan or modifica- tion already in place.

An Examination of Mortgage Foreclosures, Modifications, Repayment Plans and Other Loss Mitigation Activities in the Third Quarter of 2007

The grim toll that the U.S. mortgage crisis has taken on financial markets has been felt worldwide, from traders in Hong Kong to small-town mayors in Europe to pensioners in the American Midwest.

But largely spared have been financiers on Wall Street, a place where brokers, bankers and traders are called into corner offices at the end of each year and told how large a bonus they’ll receive for the year’s work. The size of the figure reflects their value to the company, and many feared — even complained out loud — that the amount would be badly affected by the subprime mess.

They needn’t have worried. Wall Street bonuses totaled $33.2 billion in 2007, down just 2 percent, by the estimates of the New York state comptroller’s office.

The Bonuses Keep Coming: Year-End Payouts Dipped Only Slightly on Wall St.

Even as thousands of people were losing their homes in the subprime mortgage lending mess that many economists say set off instability in the US and world financial markets, the mortgage lending industry spent generously in Washington on federal lobbying and campaign contributions and fended off attempts at regulation and oversight, a Common Cause study shows.

The report shows that even as record numbers of people began home foreclosure proceedings after receiving mortgages they could not afford, the mortgage lending industry spent nearly $32 million in 2007 lobbying the federal government and donating to Members of Congress and the national political parties. That came on the heels of $187 million the industry spent lobbying in Washington from 1999 to 2006, and likely contributed to Congress’ hands off approach to oversight or regulation, even as consumer advocates predicted problems with subprime lending.

While campaign donations favored Republicans prior to 2007, mortgage industry donations moved toward Democrats once they took control in 2006. The industry contributed $1.23 million to Democrats and $1.21 million to Republicans from January to June 2007.

Mortgage industry spent generously in Washington, even as subprime lending mess heated up