The risk that asset price bubbles pose for financial stability is still not clear. Drawing on 140 years of data, this column argues that leverage is the critical determinant of crisis damage. When fuelled by credit booms, asset price bubbles are associated with high financial crisis risk; upon collapse, they coincide with weaker growth and slower recoveries. Highly leveraged housing bubbles are the worst case of all.
Òscar Jordà, Moritz Schularick, Alan Taylor, Tuesday, September 1, 2015 - 00:00
Fergal McCann, Tara McIndoe-Calder, Tuesday, September 23, 2014 - 00:00
Christoph Trebesch, Helios Herrera, Guillermo L. Ordoñez, Saturday, September 6, 2014 - 00:00
Alberto Martin, Jaume Ventura, Saturday, July 5, 2014 - 00:00
There is a widespread view among macroeconomists that fluctuations in collateral are an important driver of credit booms and busts. This column distinguishes between ‘fundamental’ collateral – backed by expectations of future profits – and ‘bubbly’ collateral – backed by expectations of future credit. Markets are generically unable to provide the optimal amount of bubbly collateral, which creates a natural role for stabilisation policies. A lender of last resort with the ability to tax and subsidise credit can design a ‘leaning against the wind’ policy that replicates the ‘optimal’ bubble allocation.
Charles W Calomiris, Friday, March 21, 2014 - 00:00
Charles Calomiris talks to Romesh Vaitilingam about his recent book, co-authored with Stephen Haber, ‘Fragile by Design: The Political Origins of Banking Crises and Scarce Credit’. They discuss how politics inevitably intrudes into bank regulation and why banking systems are unstable in some countries but not in others. Calomiris also presents his analysis of the political and banking history of the UK and how the well-being of banking systems depends on complex bargains and coalitions between politicians, bankers and other stakeholders. The interview was recorded in London in February 2014.
Willem Buiter, Friday, January 10, 2014 - 00:00
Fiscal sustainability has become a hot topic as a result of the European sovereign debt crisis, but it matters in normal times, too. This column argues that financial sector reforms are essential to ensure fiscal sustainability in the future. Although emerging market reforms undertaken in the aftermath of the financial crises of the 1990s were beneficial, complacency is not warranted. In the US, political gridlock must be overcome to reform entitlements and the tax system. In the Eurozone, creating a sovereign debt restructuring mechanism should be a priority.
César Calderón, Megumi Kubota, Sunday, December 16, 2012 - 00:00
How can we predict bad credit booms? This column argues that surges in gross private inflows are good predictors of booms in credit markets, especially those booms that end up in a systemic banking crisis. Using quarterly data on gross capital inflows and real credit, gross private inflows remain a useful measure even when accounting for the past history of credit and asset prices The evidence suggests that surges in capital flows may well mean future financial turmoil.
Ari Aisen, Michael Franken, Friday, May 28, 2010 - 00:00
What factors determined the performance of bank credit during the global crisis? This column presents evidence from 83 countries suggesting that credit booms prior to the crisis led to a sharper contraction in bank credit after the crisis. Meanwhile, the growth performance of a country’s main trading partners had a positive impact on bank credit – as did monetary policy.
Alan Taylor, Moritz Schularick, Tuesday, December 8, 2009 - 00:00
Are credit bubbles dangerous? This column presents long-run historical data showing that, over the past 140 years, episodes of financial instability were often the result of "credit booms gone wrong". Recent years witnessed an unprecedented expansion in the role of credit in the macroeconomy. It is a mishap of history that – just as credit matters more than ever before – the reigning doctrine gives it no role in central bank policies.
Giovanni Dell'Ariccia, Luc Laeven, Deniz Igan, Monday, February 4, 2008 - 00:00
Recent US mortgage market troubles unsteadied the global economy. This column summarises research analysing millions of loan applications to investigate the roots of the crisis. A credit boom may be to blame.