Financial bubbles, crashes and crises
According to an estimate from the International Monetary Fund (IMF), between 1970 and 2011 alone the world experienced no less 147 systemic banking crises, 218 currency crises and 66 sovereign debt crises (Valencia & Laeven, 2012). Such financial crises often have devastating effects on the operation of the general economy: they cause decline in investment spending, reductions in business profits, and an increase the number of bankruptcies. They also increase unemployment levels and reduce overall household income. According to figures from The US Bureau of Labor Statistics, unemployment rates in USA more than doubled in the years immediately following the financial crisis of 2008. This crisis – often termed The Great Recession or The Subprime Crisis – spread globally and caused, according to one estimate, an increase in global unemployment of about 50 million and an increase in the number of people living in extreme poverty of about 200 million (Stiglitz, 2010, p. 346).
What are the fundamental characteristics of financial crisis and why do they appear so frequently? How does the macroeconomic climate affect the occurrence of financial crisis? Are financial crises more frequent today than before? How have existing crises been solved historically and what can be done to prevent them in the future? These are some of the questions we ask, discuss and try to answer in this course. As the student’s will experience, there exist many different and often competing theories about the causes and effects of financial crisis and how to deal with them. This course provides an overview of these approaches. In addition, it introduces the students to a number of historical case studies of financial bubbles, crashes and crises, starting with three classical bubbles from the seventeenth and eighteenth century (the Tulip mania, the Mississippi bubble and the South Sea bubble) and ending with the Euro crisis (2010-). The idea is that by investigating past experiences with financial crisis we can recognize patterns in how the crises evolved and also evaluate how they were handled. Such historical knowledge may in turn help shed light on how to deal with and assessing future risks of crisis in the economy and how to deal with such crisis.
The course will be divided in a theoretical and a more empirical, or historical, part.
The theoretical part will;
- Present a number of basic concepts and issues necessary to understand the development of financial crisis.
- Describe the most important institutions within the financial sector and how international finance has developed over time.
- Discuss a number of existing theories of financial crises including the so-called Minsky-Kindleberger model and the Monetarist school on crisis development.
The empirical, or historical, part will present a number of historical case studies of financial crises, including;
- The Tulip mania (1636-37), the Mississippi bubble (1716-21) and the South Sea bubble (1711-1721),
- The Wall Street crash, the Great Depression and the crises of the 1930s,
- The Nordic banking crisis of the 1990s,
- The Asian crisis (1997/98),
- The Subprime crisis (2008) and
- The Euro crisis (2010-).
Learning outcome knowledge
During the course students shall acquire:
- Knowledge about fundamental concepts (such as money and debt), about financial institutions (such as banks and regulatory authorities) and about the larger macroeconomic environment in which the financial sector is situated.
- A broad base of theoretical and empirical knowledge about financial stability and financial crises in a historical perspective.
- In-debt knowledge about historical cases of financial crisis.
- Written exam: 100%