Preliminary Syllabus Harvard Summer School, 2013 ECON S-1944: History of Financial Crisis, 1637-2013 Tuesdays and Thursdays

3:15-6:15
Professor John Komlos Professor Emeritus, University of Munich Visiting Professor, Duke University [email protected] The goal of this course is to discuss the 376-year-history of financial crisis ending with the Great Meltdown of 2008. We will ascertain recurring historical patterns of financial bubbles, however, without overlooking critical differences. If history repeats itself, why cant we avoid making the same mistakes? Youll have to take the class to find out. The Great Meltdown happened at a time when most macroeconomists (including Nobel Prize winning Bob Lucas and none other than the current Fed Chairman Ben Bernanke) were writing about the great moderation, i.e., that business cycles have practically vanished. They were obviously wrong. Why did they not see the tsunami coming? The discussion should help students approach contemporary problems and economic policy with an open mind and widen their perspective. In brief, the historical evidence enables us to gain a more thorough understanding of the global economy in which we live and work. The primary aim of the course is not to concentrate on facts, theorems, or numbers but rather to see the ig picture in an integrative and dual-disciplinary framework in a very long-run perspective. Further goals are to improve students a) rhetorical skills; b) ability to frame questions; c) analyze arguments and understand their structure, components as well as the assumptions underlying them; d) practice using concepts in novel ways; e) improve judging issues in new situations in an emotionally mature way; f) practice pattern recognition; g) evaluate, synthesize, and analyze economic issues creatively from a historical perspective. I admit that this is ambitious for a summer course but the course was very popular at the University of Munich, University of St. Gallen and at Duke Univesity where I taught it previously. And there is no math involved, just two equations! Another novelty of the course is that many of the assignments pertain to audio-visual material. So Enjoy! Class participation: teachers evaluation of students participation in class discussions will be based on: a) students ability to synthesize and evaluate issues raised in class; b) how effectively does the student help us understand aspects that are not obvious; c) how well does the student integrate interdisciplinary ideas into the discussion; d) can the student provide a broader perspective in a creative manner; e) to what extent is student actively involved in a helpful manner without monopolizing class discussion. (Give others a chance to participate; at the same time do not become a free rider by withdrawing from discussion and leaving the discussion to others.) You should be willing to argue, agree, disagree, and advocate certain points of view. As in so many other aspects of life, a golden mean is to be sought. You are expected to attend every class and to be prepared to engage in thoughtful discussion. You should have understood the assignments, be able to discuss them intelligently and be able to challenge, defend, and examine the inferences, generalizations that follow from them. Do draw connections among the various points made. Because there may not be enough time during class, discussion can and should continue online on the courses Moodle site. Participation means that you will learn also from each other. Finally, let us turn to the less important issue of Grades. There are 10 online quizzes of half an hour each. In addition, there will be a 3-hour final examination made up of ten essay questions. Undergraduate students are required to write an eight-page critical book report. Book list will be distributed in class.

Graduate students are required to write a 12-page term paper. Topics will be distributed in class. Grades will be based on the following schedule: Class discussion: 10%, Final examination: 30%. Term paper or book report: 30% Take-home (online) quizzes: 30% By the way, please turn your cell phones off during class. Use of computers, cell phones, or other electronic devices is not allowed during class except by prior permission. No eating.

Neither a borrower nor a lender be; For loan oft loses both itself and friend, And borrowing dulls the edge of husbandry, Polonius in Shakespeares Hamlet Act 1, scene3. Textbook: Paul Krugman (2009). The Return of Depression Economics and the Crisis of 2008. W.W. Norton We will also be reading parts of books that are available at Reserve desk: Niall Ferguson, The Ascent of Money: A Financial History of the World (2008). Charles Kindleberger, Manias, Panics, and Crashes, A History of Financial Crises (1977) . Graduate students only: Milton Friedman and Anna Schwartz, A Monetary History of the United States, 1867-1960 (1963) Week 1. Bubbles recurring: The Tulip Mania of 1637, the South Sea Bubble of 1720, and the Mississippi Company Bubble of 1720. Read: Niall Ferguson, 2008. The Ascent of Money: A Financial History of the World. Chapter 3. Watch on PBS: The Ascent of Money Episode 3: Blowing Bubbles http://www.youtube.com/watch?v=Iy4fHxaiJk4

Those who cannot remember the past are condemned to repeat it.George Santayana

Week 2. The Kindleberger-Minsky Model of Financial Crisis. Read: Charles Kindleberger, Manias, Panics, and Crashes, A History of Financial Crises. (1977) Chapters 1-3, and 12. Read: Hyman Minsky, The Financial Instability Hypothesis, Working Paper No. 74. The Levy Economics Institute of Bard College. http://www.levyinstitute.org/ Watch the Bank-Run scene in the 1946 movie Its a Wonderful Life: http://www.youtube.com/watch?v=qu2uJWSZkck Watch: John K. Galbraith: http://www.youtube.com/watch?v=yr4wzrOpn6I&feature=related

Week 3a. Capitalism on Trial: The Great Crash Read: Christina Romer, The Great Crash and the Onset of the Great Depression, Quarterly Journal of Economics 105 (August 1990). Watch: 1929 The Great Crash (BBC 2009) Watch: BBC: What caused the Wall Street crash? http://news.bbc.co.uk/2/hi/programmes/newsnight/8326161. stm

Week 3b. The Great Depression (Contd) Graduate students only: Read: Milton Friedman and Anna Schwartz, A Monetary History of the United States, 1867-1960. (NBER 1963) Chapters 7 & 8: The Great Contraction, 1929-33. Graduate students only: Read: Ben Bernanke, The Macroeconomics of the Great Depression: A Comparative Approach," Journal of Money, Credit and Banking, 1995, 27, 1-28. Read: Bernanke, B. "Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression," American Economic Review, (1983), pp. 257-276. Watch: Milton Friedman, Free to Choose, Vol. 3, The Anatomy of a Crisis http://video.google.com/videoplay?docid=-5329526746115377061#

Week 4a. Homo-Oeconomicus Blowing Bubbles: Economic Psychology Read: Kahneman, D. "Maps of Bounded Rationality: Psychology for Behavioral Economics." American Economic Review (December 2003): 1449-1475. Watch: Kahneman Noble Prize lecture: http://nobelprize.org/mediaplayer/index.php?id=531 Graduate students only: Matthew Rabin, Psychology and Economics. Journal of Economic Literature, Vol. 36, No. 1. (Mar., 1998), pp. 11-46.

Week 4b: Deregulation and market instability at the turn of the 21st century
Read: The Three Marketeers , Time Magazine, Feb. 15, 1999. Read: Simon Johnson, The Quiet Coup, The Atlantic, May, 2009. http://www.theatlantic.com/magazine/archive/2009/05/thequiet-coup/7364/ Watch: Robert Shiller: Behavioral Finance. http://www.youtube.com/watch?v=0ZLNbxWH8Lc&feature=related Watch: Simon Johnson: http://www.pbs.org/moyers/journal/02132009/watch.html

"...as long as the music is playing, you've got to get up and dance. We're still dancing." Chuck Prince, CEO of Citibank, July 10, 2007.

Week 5a. Greenspans double bubble: Dot-coms and the Great Meltdown
Graduate students only: Read: John Taylor. The Financial Crisis and the policy responses: An Empirical Analysis of what went wrong, NBER Working paper 14631. Read: Joseph Stiglitz, America's Socialism for the Rich, The Economists' Voice, 6(6), 2009. Listen: Regulators fail: http://www.nytimes.com/interactive/2008/09/28/business/20080928SEC-multimedia/index.html Watch: Alan Greenspan on the Credit Tsunami: http://video.nytimes.com/video/2008/10/23/business/1194827509979/greenspan-discussescredit-tsunami.html

Week 5b. The Financial Engineers meet asymmetric information

Read: Joseph Stiglitz, Information and the Change in the Paradigm in Economics, American Economic Review, 92(3), June 2002, pp. 460-501. Watch: Joseph Stiglitz receiving the Nobel Prize: http://nobelprize.org/mediaplayer/index.php?id=159 Watch: Joseph Stiglitzs Nobel Prize lecture on Asymmetric Information http://nobelprize.org/mediaplayer/index.php?id=507 Derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal." Warren Buffett, (Second richest man in America) report to his stockholders in 2002. http://www.berkshirehathaway.com/2002ar/2002ar.pdf

Week 6a. The (Mis)pricing of Risk

Watch: Brooksley Born on Frontline: The Warning http://www.pbs.org/wgbh/pages/frontline/warning/view/ Watch: Nassim Taleb on Black Swan http://fora.tv/2009/08/18/David_Cameron_in_Conversation _with_Nassim_Taleb Watch: Nouriel Roubini (Dr. Doom): http://www.youtube.com/watch?v=51SxmcaKJIw

Week 6b. Bankruptcies, Foreclosures, and the Great Recession

Read: Paul Krugman (2009). The Return of Depression Economics and the Crisis of 2008. W.W. Norton Watch: Elizabeth Warren on Middle Class bankruptcies: http://www.uctv.tv/search-details.aspx?showID=12620 Listen: Two views on Obama Stimulus Plan: Paul Krugman vs Russ Roberts: http://www.npr.org/templates/story/story.php?storyId=9967 9106

Week 6c. Lessons learned (and not learned): We were all Keynesians for a few months Watch: Joseph Stiglitz Market fundamentalism is dead: http://www.youtube.com/watch?v=x_2-Tv2GPs0 Watch: Nouriel Roubini on the future of finance: http://fora.tv/2010/05/13/Nouriel_Roubini_A_Crash_Cours e_in_the_Future_of_Finance