Financial Markets, Banking, and Monetary Policy

CHAPTER 15 Financial Crises

WHAT YOU WILL LEARN IN THIS CHAPTER

• How financial crises have been an important part of our history.
• Why some bursts of asset bubbles have major consequences for the functioning of the financial system and the economy and others do not.
• How recessions caused by financial crises tend to be more severe and recoveries from those downturns less robust.
• How large losses of asset values at commercial banks and other financial institutions and maturity mismatches between assets and liabilities are at the heart of financial crises.
• How recent financial crises and classic banking panics have many similarities.
• How the recent financial crisis compares with that of the Great Depression.
• The meaning of the shadow banking system.
• The meaning of systemic risk and its implications for public policy.
• How public policy toward large, systemically important financial institutions has changed in response to the recent financial crisis, including as prescribed by Dodd-Frank legislation.

BACKGROUND

The recent financial crisis has touched nearly everyone on this planet—leaving deep scars on many. A consequence of the financial crisis was the Great Recession, the worst in the postwar period. Moreover, the recovery from this recession has been tepid, as has been typical of previous recoveries from financial crises.¹ Some have laid the blame for this debacle on government policies, while others have pointed the finger at reckless, unbridled commercial banks and other ...