By John H. Cochrane
Regulation Winter 2009-2010

With the benefit of a year’s hindsight, we can now look on the financial crisis and determine what was really the central problem, as well as identify what are the most important policy changes needed to avoid repeating the crisis. In my view, the usual suspects — “global imbalances” of saving or imports and exports, the Fed’s low rates, a housing “bubble,” subprime mortgages, fancy derivatives — are not that important. Once we put all that aside, I think we can focus on the real problems and their solution.

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By the Squam Lake Working Group on Financial Regulation
July 2009

Retirement saving is undergoing a fundamental change as employers shift from defined benefit pension plans to defined contribution plans, such as 401(k) accounts. Defined contribution plans have important advantages: they allow households to customize their retirement saving to their own risk preferences and circumstances, they insulate pensioners from potential bankruptcies of their employers, and although there may be a modest vesting period, they allow workers to move from job to job without risking their pensions. These plans also place much greater burdens on consumers to make good financial decisions. But there is widespread concern that many households are not up to the task.

The Squam Lake Group, which includes Professors Cochrane, Diamond, Kashyap, and Rajan, just released a memo, “Regulation of Retirement,” which explores this issue.

Read previous Squam Lake proposals

By Eric A. Posner and Luigi Zingales
*UPDATED*

The housing crisis threatens to destroy hundreds of billions of dollars of value by causing homeowners with  negative equity to walk away from their houses. A house in foreclosure is worth 30 to 50 percent less than a house that a homeowner either retains or sells on the market, and a foreclosed house damages neighboring property values as well. We advocate a reform of Chapter 13 that would allow homeowners to strip down the value of their mortgages in a prepackaged bankruptcy. Such a plan would give homeowners an incentive to keep or resell their homes, thus reducing the market value loss of homes while protecting the effective value of creditors’ interests. Two further key elements of the plan are that it uses prices based on the average house price in a particular ZIP code, which reduces moral hazard; and it is automated, requiring only a rubber stamp by a bankruptcy judge or other official, thus preserving judicial resources. Other plans, including that of the Obama administration, are compared.

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Note: This link reflects the updated version of this paper which is forthcoming in the American Law and Economic Review

by Takeo Hoshi and Anil K Kashyap
NBER Working Paper Series  ** updated version **

The U.S. government is using a variety of tools to try to rehabilitate the U.S. banking industry. The two principal policy levers discussed so far are employing asset managers to buy toxic real estate securities and making bank equity purchases. Japan used both of these strategies to combat its banking problems. There are also a surprising number of other similarities between the current U.S. crisis and the recent Japanese crisis, The Japanese policies were only partially successful in recapitalizing the banks. Hoshi and Kashyap explain why that was the case and then compare the current U.S. plans with those pursued in Japan. While the U.S. plans are still in flux, it appears that U.S. is at risk for running into some of the same problems that hobbled the Japanese policies.

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* This revised paper expands substantially on the analysis in an earlier version.

December 3, 2008

By Oliver Hart and Luigi Zingales

This year will be remembered not just for one of the worst financial crises in American history, but also as the moment when economists abandoned their principles. There used to be a consensus that selective intervention in the economy was bad. In the last 12 months this belief has been shattered.

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November 19, 2008

by Joshua Rauh and Luigi Zingales

Not long ago, Alitalia was one of the largest airlines in the world. Today it is a shadow of its former self, having burned massive amounts of money. The culprit was the Italian government, which continued providing subsidized financing to the money-losing airline, delaying the necessary restructuring. It was a death sentence for the very company it wanted to save. Postponing the day of reckoning weakened Alitalia’s competitive position and permanently destroyed its market share. General Motors is tumbling down the same path.

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November 18, 2008

To wrap up the series of Credit Crisis lectures in our Myron Scholes Forum, Brian Barry, John Cochrane, Steven N. Kaplan and Raghuram G. Rajan look at some likely consequences of the crisis, and offer possible steps to resolve it and lessen its impact without setting terrible precedents.

Watch Video, View Kaplan pdf, View Cochrane pdf, View Rajan pdf

The four previous lectures in our Scholes Forum Credit Crisis series, including videos and slides, can also be found here

November 11, 2008

Anil Kashyap presents the fourth lecture of the Credit Crisis Series, part of the Myron Scholes Global Markets Forum.

Watch video and View pdf

November 6, 2008

By Raghuram Rajan

The central problem in fostering global economic dialogue is that it is currently a dialogue between the deaf. Industrial countries stopped requiring financing long ago, believe they are responsible global citizens, and guard their policy independence carefully. It seems they view the primary role of multilateral institutions as correcting the policy mistakes and the naked mercantilism of emerging markets, and of course providing aid to the very poor. Emerging markets feel multilateral institutions follow an agenda set by the industrial countries, and don’t see why their own policies should be under scrutiny when industrial countries show scant regard for the multilateral institutions (other than to enforce their bidding). And poor developing countries, beset with their own problems, have little time or interest in a global agenda.

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November 06, 2008

In today’s Slate, Ray Fisman of Columbia Business School writes “What’s In It for Me?: How congressmen decided to vote for the bailout.”

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For a detailed analysis of the bailout, see a new working paper by Atif Mian, Amir Sufi, and Francesco Trebbi of the Chicago GSB.

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