Liquidity and Financial Crises

Popular accounts of the global financial crisis have mainly been looking for guilty parties. Greedy investment bankers, captive regulatory agents and ignorant consumers have been among the main characters implicated.
Before blaming human weaknesses, it is all important to understand to what extent the crisis was due to fundamental weaknesses in the financial system. No single, coherent theory or narrative has emerged that would adequately answer the many questions related to the financial crisis. But a set of identifiable approaches and set of models, building mainly on insights from modern corporate finance and contract theory, have emerged that have proved helpful in thinking about the financial crisis in a more structured way. The purpose of this lecture series is to present some representative models that can help us analyze financial crises.
The lectures were structured around three topics:

• The demand for and supply of liquidity;
• The role of debt;
• Fragility and panics.

An introductory lecture for MPhil students ‘Theories of debt‘ was given by Enrico Perotti on September 9.

Bengt R. Holmström is the Paul A. Samuelson Professor of Economics at Massachusetts Institute of Technology. He is a fellow of the American Academy of Arts and Sciences, the Econometric Society and an elected foreign member of the Royal Swedish Academy of Sciences and the Finnish Academy of Sciences and Letters. He is a research associate of the National Bureau of Economic Research, a member of the executive committee for the Center of Economic Policy Research and second Vice President of the Econometric Society.
Professor Holmström’s research interests are in the fields of contracting and incentives. He has contributed to the development of the theory of contracting and incentives, the theory of the firm, corporate governance the most recently to the understanding of liquidity problems and financial crises.