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

229 Pages·2011·6.51 MB·English

by  George Chacko

The Global Economic System
How Liquidity Shocks Affect Financial Institutions and Lead to
Economic Crises
George Chacko
Carolyn L. Evans
Hans Gunawan
Anders L. Sjöman
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© 2011 by Pearson Education, Inc.
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Printed in the United States of America
First Printing June 2011
First Printing June 2011
ISBN-10: 0-13-705012-7
ISBN-13: 978-0-13-705012-3
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Library of Congress Cataloging-in-Publication Data
The global economic system : how liquidity shocks affect financial institutions
and lead to economic
crises / George Chacko ... [et al.].
p. cm.
ISBN 978-0-13-705012-3 (hbk. : alk. paper)
1. International finance. 2. Liquidity (Economics) 3. Financial crises. I.
Chacko, George.
HG3881.G57534 2011
332'.042—dc22
2011010482
George dedicates this to Hemu, Manju, Leah, and Shreya.
Carolyn thanks her father and mother for all their support.
Hans dedicates this book to his loving parents.
Anders is, as always, in constant awe of Alvar.
Contents
1. Motivation for Understanding Liquidity Risk
1.1. Peso Problem
1.2. Liquidity Risk—The Peso Problem of Our Time
1.3. WorldCom
1.4. Hedge Fund Returns
1.5. The Structure of This Book
Endnotes
2. Liquidity Risk: Concepts
2.1. Introduction
2.2. What Is Liquidity?
2.3. Model of Liquidity Costs
2.4. Liquidity Risk and Liquidity Shocks
2.5. Liquidity Risk Premium
2.6. Why Bear Liquidity Risk?
2.7. Liquidity-Driven Investing (LqDI)
2.8. Liquidity Risk Exposure in Bank Balance Sheets
2.9. Propagation of Liquidity Shocks: Systemic Risk
2.10. From Liquidity Crisis to Credit Crisis
Endnotes
3. The Great Depression
3.1. The Stages of a Liquidity Shock
3.2. Recognizing a Liquidity Shock—Interpreting the Data
3.3. Setting the Stage for the Trigger—the Background for the Great
Depression
3.4. Stage 1: The Trigger
3.5. Stage 2: Change in Liquidity Demanded Throughout the Economy
3.6. Stage 3: Changes in Bank Balance Sheets
3.7. Stage 4: Banks Change Activities to Bolster Balance Sheets
3.8. Stage 5: Effect on Liquidity and Availability of Credit Throughout the
Economy
3.9. Stage 6: Real Effects of Decline in Liquidity Observed Throughout the
Economy
3.10. Conclusion: The Great Depression, a True Liquidity Shock
Endnotes
References
4. Japan’s Lost Decade
4.1. The Stages of a Liquidity Shock—Revisited and Expanded
4.2. Recognizing a Liquidity Shock—Interpreting the Data
4.3. Setting the Stage for the Trigger—the Background to Japan’s Lost
Decade
4.4. Stage 1: The Trigger
4.5. Stage 2: Change in Liquidity Demanded Throughout the Economy
4.6. Stage 3: Changes in Bank Balance Sheets
4.7. Stage 4: Banks Change Activities to Bolster Balance Sheets
4.8. Stage 5: Effect on Liquidity and Availability of Credit Throughout the
Economy
4.9. Stage 6: Real Effects of Decline in Liquidity Observed Throughout the
Economy
4.10. Conclusion: Japan’s Lost Decade, a Liquidity Shock That Dragged On
Endnotes
References
5. The Great Recession
5.1. The Stages of a Liquidity Shock—Same Applies Now as with the Great
Depression
5.2. Recognizing a Liquidity Shock—Interpreting the Data
5.3. Setting the Stage for the Trigger—the Background to the Great
Recession
5.4. Stage 1: The Trigger
5.5. Stage 2: Change in Liquidity Demanded Throughout the Economy
5.6. Stage 3: Changes in Bank Balance Sheets
5.7. Stage 4: Banks Change Activities to Bolster Balance Sheets
5.8. Stage 5: Effect on Liquidity and Availability of Credit Throughout the
Economy
5.9. Stage 6: Real Effects of Decline in Liquidity Observed Throughout the
Economy
5.10. Conclusion
Endnotes
References
6. Conclusion
6.1. A Liquidity Crisis
6.2. Bank Accounting Changes
6.3. Bank Nationalization
6.4. Debt Guarantees
6.5. Central Bank Lending
6.6. Monetary Policy
6.7. Fiscal Spending
6.8. Preventing Liquidity Crises
Endnotes
Index