Gleaser et al (eds ) after the flood; how the great recession changed economic thought (2017)

After the Flood After the Flood How the Great Recession Changed Economic Thought edward l glaeser, tano santos, and e glen weyl the university of chicago press chicago and london The University of Chicago Press, Chicago 60637 The University of Chicago Press, Ltd., London c 2017 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 2017 Printed in the United States of America 26 25 24 23 22 21 20 19 18 17 ISBN-13: 978-0-226-44354-6 (cloth) ISBN-13: 978-0-226-44368-3 (e-book) DOI: 10.7208/chicago/9780226443683.001.0001 Library of Congress Cataloging-in-Publication Data Names: Scheinkman, José Alexandre, honouree | Glaeser, Edward L (Edward Ludwig), 1967- editor, author | Santos, Tano, editor, author | Weyl, E Glen (Eric Glen), 1985- editor, author | Columbia University Graduate School of Business, host institution Title: After the flood : how the Great Recession changed economic thought / Edward L Glaeser, Tano Santos, and E Glen Weyl [editors] Description: Chicago : the University of Chicago Press, 2017 | Includes papers presented at a conference held at the Columbia Business School in the spring of 2013 in honor of José Scheinkman’s 65th birthday | Includes index Identifiers: LCCN 2016044854 | ISBN 9780226443546 (cloth : alk paper) | ISBN 9780226443683 (e-book) Subjects: LCSH: Financial crises—Congresses | Financial crises—Prevention—Congresses | Banks and banking—Congresses | Capital assets pricing model—Congresses Classification: LCC HB3722 A3225 2017 | DDC 332—dc23 LC record available at https://lccn.loc.gov/2016044854 ∞ This paper meets the requirements of ANSI/NISO Z39.48-1992 (Permanence of Paper) for josé and michele Contents chapter Introduction Edward L Glaeser, Tano Santos, and E Glen Weyl chapter Stochastic Compounding and Uncertain Valuation 21 Lars Peter Hansen and José A Scheinkman chapter The Good Banker 51 Patrick Bolton chapter How to Implement Contingent Capital 73 Albert S Kyle chapter Bankruptcy Laws and Collateral Regulation: Reflections after the Crisis 123 Aloisio Araujo, Rafael Ferreira, and Bruno Funchal chapter Antes del Diluvio: The Spanish Banking System in the First Decade of the Euro 153 Tano Santos chapter Are Commodity Futures Prices Barometers of the Global Economy? 209 Conghui Hu and Wei Xiong chapter Social Learning, Credulous Bayesians, and Aggregation Reversals 243 Edward L Glaeser and Bruce Sacerdote viii chapter Finance and the Common Good 277 E Glen Weyl Acknowledgments 303 List of Contributors 305 Index 307 contents chapter one Introduction Edward L Glaeser, Tano Santos, and E Glen Weyl he past three decades have been characterized by phenomenal upheavals in financial markets: the United States has witnessed two remarkable cycles both in the stock market during the late 1990s and in real estate during the first decade of the 21st century, followed by the Great Recession, the Japanese banking crisis that itself followed two equally impressive cycles in that country’s stock and real estate markets, the larger Asian crisis of 1997, and the Eurozone banking crisis that still is ongoing at the time of this writing These crises have occurred not in politically unstable countries without sound governance institutions and stable contractual environments, but at the heart of the developed world: the United States, Japan, and the Eurozone The fact that all these events have led to a flurry of books, papers, journal special issues, and so on exploring the causes of, consequences of, and remedies for large systemic financial crises, which some had thought a thing of the past, is therefore not surprising What are the origins of these speculative cycles? Are modern financial systems inherently prone to bubbles and instabilities? What are the effects on the real economy? This volume follows in this tradition but takes a distinct perspective The chapters in this book consist of papers presented at a conference held at the Columbia Business School in the spring of 2013 in honor of José Scheinkman’s 65th birthday These papers are centered on the lessons learned from the recent financial crisis, issues that have been high in José’s agenda for some time now They are all written by José’s coauthors and former students during his remarkable and ongoing career as an economist José’s contributions span many different fields in economics, T ... compounding and uncertain valuation exp(−ηj)[Mj f ](x) = e(x)E Mj M0 29 f (Xj )? ?e(Xj )| X0 = x = e(x)[Mj (f e˜ )] (x) The stability condition ( 5) allows us to interpret η as the asymptotic rate of.. .After the Flood After the Flood How the Great Recession Changed Economic Thought edward l glaeser, tano santos, and e glen weyl the university of chicago press chicago and london The University... consider the “inverse” of relation ( 7): ( 8) [Sf ](x) = exp(η)E [f (Xt+1 )? ?e(Xt+1 )| Xt = x] e(x) Perron-Frobenius theory suggests representing S by the expression on the right-hand side of ( 8) Using the