The Global Economic System How Liquidity Shocks Affect Financial Institutions and Lead to Economic Crises

by Chacko, George; Evans, Carolyn L.; Gunawan, Hans; Sjoman, Anders L.

• ISBN13: 9780137050123
• ISBN10: 0137050127
• Edition: 1st
• Format: Hardcover
• Copyright: 2011-06-12
• Publisher: FT Press

Summary

This is the first professional-level authoritative guide to today's global financial system: how it works, how its elements fit together, and the vulnerabilities that can cause it to fail. Writing for working financial professionals and other sophisticated readers, the authors thoroughly explain the modern global credit system; the roles of banks, hedge funds, insurers, central banks, mortgage markets, and other participants; and the credit-related instruments they rely on. In particular, the authors illuminate the crucial importance of liquidity, and show why liquidity failures have been the key cause of all major market crashes for the past several decades.The Global Financial Systemthoroughly examines economic environments in which slow de-leveraging leads to prolonged sluggish growth, and compares today's environment to other periods of deleveraging, such as the Great Depression and the Japanese economic meltdown of the '90s and '00s. It predicts potential pathways for the current crisis, and offers essential guidance to both policymakers and investment decision-makers.

Author Biography

George Chacko is Associate Professor of Finance at Santa Clara University’s Leavey School of Business and formerly Associate Professor at Harvard Business School, Managing Director at State Street Bank, and Chief Investment Officer at Auda Alternative Investments. He holds a Ph.D. and M.A. in Business Economics from Harvard University and a B.S. from MIT.

 

Carolyn L. Evans is Associate Professor of Economics at Santa Clara University. She has worked at the Federal Reserve Bank of New York, the Federal Reserve Board of Governors, and the White House Council of Economic Advisers. She holds a Ph.D. and M.A. in Economics and a B.A. in East Asian Languages and Civilizations, all from Harvard University.

 

Hans Gunawan is Senior Financial Analyst at Skyline Solar and formerly a manager of financial planning and analysis at JAPFA. He holds an MBA from Santa Clara University and a B.S. from University of California, Berkeley.

 

Anders Sjöman is Vice President of Communications at Voddler. He was formerly Senior Researcher for Harvard Business School’s Paris-based Europe Research Center. He holds an M.Sc. from the Stockholm School of Economics.

Table of Contents

Motivation for Understanding Liquidity Risk	p. 1
Peso Problem	p. 2
Liquidity Risk-The Peso Problem of Our Time	p. 3
WorldCom	p. 4
Hedge Fund Returns	p. 6
The Structure of This Book	p. 8
Endnotes	p. 9
Liquidity Risk: Concepts	p. 11
Introduction	p. 11
What Is Liquidity?	p. 11
Model of Liquidity Costs	p. 15
Liquidity Risk and Liquidity Shocks	p. 21
Liquidity Risk Premium	p. 25
Why Bear Liquidity Risk?	p. 32
Liquidity-Driven Investing (LqDI)	p. 34
Liquidity Risk Exposure in Bank Balance Sheets	p. 42
Propagation of Liquidity Shocks: Systemic Risk	p. 46
From Liquidity Crisis to Credit Crisis	p. 50
Endnotes	p. 52
The Great Depression	p. 59
The Stages of a Liquidity Shock	p. 59
Recognizing a Liquidity Shock-Interpreting the Data	p. 65
Setting the Stage for the Trigger-the Background for the Great Depression	p. 73
Stage 1: The Trigger	p. 79
Stage 2: Change in Liquidity Demanded Throughout the Economy	p. 82
Stage 3: Changes in Bank Balance Sheets	p. 85
Stage 4: Banks Change Activities to Bolster Balance Sheets	p. 87
Stage 5: Effect on Liquidity and Availability of Credit Throughout the Economy	p. 90
Stage 6: Real Effects of Decline in Liquidity Observed Throughout the Economy	p. 93
Conclusion: The Great Depression, a True Liquidity Shock	p. 98
Endnotes	p. 100
References	p. 103
Japan's Lost Decade	p. 105
The Stages of a Liquidity Shock-Revisited and Expanded	p. 105
Recognizing a Liquidity Shock-Interpreting the Data	p. 110
Setting the Stage for the Trigger-the Background to Japan's Lost Decade	p. 117
Stage 1: The Trigger	p. 124
Stage 2: Change in Liquidity Demanded Throughout the Economy	p. 125
Stage 3: Changes in Bank Balance Sheets	p. 129
Stage 4: Banks Change Activities to Bolster Balance Sheets	p. 141
Stage 5: Effect on Liquidity and Availability of Credit Throughout the Economy	p. 149
Stage 6: Real Effects of Decline in Liquidity Observed Throughout the Economy	p. 155
Conclusion: Japan's Lost Decade, a Liquidity Shock That Dragged On	p. 161
Endnotes	p. 162
References	p. 169
The Great Recession	p. 173
The Stages of a Liquidity Shock-Same Applies Now as with the Great Depression	p. 173
Recognizing a Liquidity Shock-Interpreting the Data	p. 176
Setting the Stage for the Trigger-the Background to the Great Recession	p. 182
Stage 1: The Trigger	p. 196
Stage 2: Change in Liquidity Demanded Throughout the Economy	p. 201
Stage 3: Changes in Bank Balance Sheets	p. 205
Stage 4: Banks Change Activities to Bolster Balance Sheets	p. 212
Stage 5: Effect on Liquidity and Availability of Credit Throughout the Economy	p. 217
Stage 6: Real Effects of Decline in Liquidity Observed Throughout the Economy	p. 224
Conclusion	p. 237
Endnotes	p. 238
References	p. 243
Conclusion	p. 247
A Liquidity Crisis	p. 247
Bank Accounting Changes	p. 249
Bank Nationalization	p. 250
Debt Guarantees	p. 252
Central Bank Lending	p. 253
Monetary Policy	p. 255
Fiscal Spending	p. 256
Preventing Liquidity Crises	p. 258
Endnotes	p. 259
Index	p. 261
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