hoffman - surviving large losses; financial crises, the middle class, and the development of capital markets (2007)

[...]... and consequences of crises? What do they divulge about the relationship between crises, institutions, and long-run financial development? What they show is that three factors are critical for the development of financial institutions: the level of government debt, the size of the middle class, and the amount of information that is available for parties to perform financial transactions To illustrate the. .. avoided Yet the truth is that financial crises are virtually inevitable, like earthquakes or hurricanes Indeed, despite all the reforms they have inspired, they continue to batter us, as we can see from the collapse of the Asian banks and stock markets, the bursting of the Internet bubble and subsequent wave of bankruptcies, and the corporate scandals of the late 1990s Nor do they show any signs of abating,... debt We then examine the demands for institutional change that arise in the wake of crises, show how these demands are shaped by our third factor the size of the middle class and then see how they can be met, whether by the government or by private entrepreneurs Throughout, we ask what institutions will make financial markets more effective, by encouraging financial development and limiting the harm... difference due in large part to the French king’s regular habit of defaulting The existence of these secure and easily traded English securities furthered the development of the London capital market, making it the financial center of Europe by the early 1800s.13 Crises did occasionally arise, but they did not begin with a government default or some other act of state plunder.14 Whereas England remained... on the short-term debt and entered into negotiation with the bankers The outcome, typically, involved giving the bankers long-term bonds in return for their short-term debt—a form of debt consolidation.15 The suspensions—there were ten of them between 1557 and 1662—might be considered crises, but it could be argued that the bankers knew what they were getting into, at least initially They knew the. .. consequences and in particular how they shape the evolution of financial systems The crux of the matter is determining how crises affect and are in turn affected by the development of financial institutions Are there institutions that attack the causes of crises and make it less likely that they will strike? Are there institutions that prevent crises from crippling a financial system when they do hit? Are there... enemies, the kings of France; and to hold together a farflung empire, which stretched west to Mexico and east as far as the Philippines By the late sixteenth century, these monarchs expected abundant long-term revenues, including mountains of silver shipped from mines in Mexico and Peru; but the wars demanded immediate financing They had to borrow, and borrow they did, running The Political Economy of Financial. .. increases and the transfer of resources typically aroused daunting political resistance Thus the nominally absolute rulers of seventeenth-century Spain had great difficulty getting troops and tax increases from regions other than Castile (the heartland of their kingdom, where their authority was strongest), especially when the soldiers and the men were to be sent abroad or to other parts of the Spanish... Nonetheless, some states have managed to move their danger zones further away They then run less of chance of having a shock catapult them toward the extreme levels of debt where victimizing financial markets becomes attractive England was one of the first, in the aftermath of the Glorious Revolution (1688–89), which deposed King James II and established parliamentary supremacy over legislation and taxation... applies: the logic of public debt levels and of danger zones determined by politics, fiscal systems, and the strength of the economy The experience of the early modern states lets us see how that logic plays out In developing countries it is still at work, while in Europe the long-run consequences are still visible Public Debt and the Government’s Role Public debt plays the starring role in the drama of governmental . alt="" Surviving Large Losses S urviving Large Losses FINANCIAL CRISES, theMIDDLE CLASS, and the DEVELOPMENT OF CAPITAL MARKETS Philip T. Hoffman Gilles Postel-Vinay Jean-Laurent Rosenthal THE. the reforms they have inspired, they continue to batter us, as we can see from the col- lapse of the Asian banks and stock markets, the bursting of the Inter- net bubble and subsequent wave of. America Cataloging-in-Publication Data available from the Library of Congress Library of Congress catalog card number: 2006041275 ISBN-13: 97 8-0 -6 7 4-0 246 9-4 (alk. paper) ISBN-10: 0-6 7 4-0 246 9-9 (alk. paper) Contents Acknowledgments