Table Of ContentLeveraged
Leveraged
The New Economics of Debt
and Financial Fragility
edited by
moritz schularick
The University of Chicago Press
Chicago and London
The University of Chicago Press, Chicago 60637
The University of Chicago Press, Ltd., London
© 2022 by The University of Chicago
All rights reserved. No part of this book may be used or reproduced in any manner
whatsoever without written permission, except in the case of brief quotations in critical
articles and reviews. For more information, contact the University of Chicago Press,
1427 E. 60th St., Chicago, IL 60637.
Published 2022
Printed in the United States of America
31 30 29 28 27 26 25 24 23 22 1 2 3 4 5
isbn- 13: 978- 0- 226- 81693- 7 (cloth)
isbn- 13: 978- 0- 226- 81694- 4 (e- book)
doi: https://doi.org/10.7208/chicago/9780226816944.001.0001
Library of Congress Cataloging-in-Publication Data
Names: Schularick, Moritz, 1975– editor.
Title: Leveraged : the new economics of debt and financial fragility /
edited by Moritz Schularick.
Other titles: New economics of debt and financial fragility
Description: Chicago ; London : The University of Chicago Press, 2022. |
Includes bibliographical references and index.
Identifiers: lccn 2022012491 | isbn 9780226816937 (cloth) |
isbn 9780226816944 (ebook)
Subjects: lcsh: Finance. | Capital market. | Debt. | Risk. | Financial crises. |
bisac: BUSINESS & ECONOMICS / Economics / Macroeconomics |
BUSINESS & ECONOMICS / Economic Conditions
Classification: lcc hg173 .l4835 2022 | ddc 332—dc23/eng/20220511
LC record available at https://lccn.loc.gov/2022012491
♾ This paper meets the requirements of ansi/niso z39.48-1 992 (Permanence of Paper).
Contents
Foreword by Richard Vague vii
Introduction: The New Economics of Debt and Financial Fragility 1
Moritz Schularick
part i Finance Unbound: The Rise of Finance and the Economy
1 How to Think about Finance 17
Atif Mian
Comment by Karen Dynan
2 Reconsidering the Costs and Benefits of Debt Booms
for the Economy 32
Emil Verner
Comment by Holger Mueller
part ii Risk- Taking: Incentives, Investors, Institutions
3 Are Bank CEOs to Blame? 59
Rüdiger Fahlenbrach
Comment by Samuel G. Hanson
4 A New Narrative of Investors, Subprime Lending,
and the 2008 Crisis 79
Stefania Albanesi
Comment by Fernando Ferreira
5 Bank Capital before and after Financial Crises 116
Òscar Jordà, Björn Richter, Moritz Schularick, and Alan M. Taylor
Comment by Anna Kovner
part iii Mispricing Risks: Credit Booms and Risk Premia
6 Beliefs and Risk- Taking 139
Alessia De Stefani and Kaspar Zimmermann
Comment by Yueran Ma
7 A New Approach to Measuring Banks’ Risk Exposure 165
Juliane Begenau
Comment by Nina Boyarchenko
8 Is Risk Mispriced in Credit Booms? 187
Tyler Muir
part iv Financial Crises: Reconsidering the Origins
and Consequences
9 Historical Banking Crises: A New Database and a Reassessment
of Their Incidence and Severity 209
Matthew Baron and Daniel Dieckelmann
Comment by Mark Carlson
10 Was the U.S. Great Depression a Credit Boom Gone Wrong? 233
Natacha Postel- Vinay
Comment by Eugene N. White
11 Sectoral Credit Booms and Financial Stability 270
Karsten Müller
Comment by Orsola Costantini
Index 299
Foreword
In June 2019, the Private Debt Initiative of the Institute for New Economic
Thinking (INET) convened an extraordinary group of economists for a con-
ference on expanding the boundaries of economic thinking on credit cycles,
private sector debt, and financial stability. Since they were from among a new
generation of economists whose thinking was shaped strongly by the 2008
financial crisis, the conference was titled, appropriately, “NextGen.”
This book presents the new economic thinking discussed at this ground-
breaking conference. It offers a synthesis of the new ideas that have emerged
over the past decade along with an examination of questions that have yet
to be addressed. I hope you will find the work presented on these pages as
challenging and rewarding as those of us in attendance at the conference did.
Private debt and credit cycles have not received their due in economic
scholarship, which helps explain why mainstream economists missed the
mountainous ascent of U.S. debt that led to the 2008 crisis. Though pub-
lic debt has drawn much more academic attention than private debt, there
is far more private debt than government debt across the world, and it is
more directly linked to economic outcomes and financial crises. In 2020,
the fragility of an economy with high private debts became apparent again.
Only extraordinary policy intervention could stabilize an ever more fragile
macroeconomy.
INET’s private debt team led by Matthew Sware was instrumental for the
success of the conference. Thanks also go to Chad Zimmerman and Chris-
tine Schwab at the University of Chicago Press for their guidance, and to
Zach Gajewski for help with editing. Special thanks go to Rob Johnson and
INET, an organization founded in the wake of the 2008 financial crisis in
viii foreword
large part because of mainstream economists’ failure to anticipate that crisis.
INET stands out in its commitment to developing and sharing the ideas that
can repair our broken economy and create a more equal, prosperous, and just
society.
Richard Vague, INET board member
May 2022
introduction
The New Economics of Debt and Financial Fragility
moritz schularick
Nobel Prize– winning economist James Tobin once called debt “the Achil-
les heel of capitalism.” Though written in the late eighties, it was a prescient
statement that has continued to resonate. When the COVID-1 9 pandemic
struck in 2020, global debt stood at record highs. In advanced economies,
households and companies were so deep in debt, levels were roughly equal
in value to three years of economic output. Companies around the world had
used a decade of low interest rates after the 2008 crisis to leverage up and
boost their returns on equity. In the pandemic, these debts turned into a mas-
sive risk, threatening not only the survival of businesses but also the integrity
of the financial system.
In an effort to stem the further spread of the COVID-1 9 virus, mass shut-
downs began, spooking financial markets. Concerns over how many of these
debts would be repaid, which companies would be able to withstand this new
crisis, and how big the damage would be for lenders, especially banks, quickly
came into focus. Within a week in March 2020, equity markets lost one third
of their value, the prices of corporate bonds fell dramatically, bank share
prices collapsed, and even the market for U.S. government debt— usually one
of the most liquid financial markets in the world— froze.
The policy response followed a now well- known playbook, the same used
during the Great Recession. Talk of “bailouts” was back in the news. Policy
makers rushed to contain the financial fallout with emergency lending, asset
purchases, and liquidity injections. Central banks’ balance sheets provided the
backstop for the financial system and were expanded at unprecedented speed.
Moritz Schularick is professor of economics at Sciences Po and the University of
Bonn, and a fellow at the Institute for New Economic Thinking.
