Financial Bubbles, Crashes and Crises

Introduction

The objective of this course is twofold. First, to provide basic knowledge about the financial system and to present theories, concepts and historical cases relevant to the understanding of financial bubbles, crashes and crisis. Second, to facilitate learning through the systematic use of writing exercises and, consequently, to teach the students how to plan, structure and write an analytical text. 

Background and course content

According to an estimate from the International Monetary Fund (IMF), between 1970 and 2011 alone, the world experienced no less than 147 systemic banking crises, 218 currency crises and 66 sovereign debt crises. 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 crises and why do they appear so frequently? How do the various institutions of the financial system function and what are their roles in the development and handling of financial bubbles, crashes, and crises? What are the main theories of the causes of financial crises and what are their main strengths and weaknesses? 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 students 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. The idea is that by investigating past experiences of financial crises 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.

Besides regular lectures, video lectures and group work the teaching of this class will be conducted through the systematic use of writing exercises. The students will be asked to hand in two written assignments during the semester. These make up a major basis for the final exam, which will consist of an academic essay presenting and discussing major concepts, theories and historical cases of financial crises.

The course will thus provide the students both with knowledge about a fundamental part of the market economy (the financial sector) – and how and why this sector historically has experienced repeated and severe crises – and improve their skills in writing analytical texts. This skill does not only represent a valuable preparation for writing the bachelor thesis, but is also fundamental to any job attainable for a graduated business school student

Course content

The course will be divided in a theoretical and a more empirical, or historical, part. In addition, the students will work on their academic essay throughout the entire semester.  

The theoretical part will

• Present a number of basic concepts necessary to understand the development of financial crisis.
• Describe the most important institutions within the financial system, including money, banks, central banks and regulatory agencies.
• Present, compare and contrast a selected set of theories of financial crises

The empirical, or historical, part will present several historical case studies of financial crises, including

• The Wall Street crash, the Great Depression and the crisis of the 1930s,
• The Norwegian banking crisis of the early 1990s, and
• The Great Recession, 2007-2009.

The academic essay will consist of three main parts. Drafts of the two first parts should be handed in and will be evaluated at set dates during the semester:

• First individual assignment: Concepts and institutions
• Second individual assignment: Theories of financial crises
• Term paper/Exam: Concepts/institutions, theories and historical cases.