IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/3407.html
   My bibliography  Save this paper

Views on the Likelihood of Financial Crisis

Author

Listed:
  • Benjamin M. Friedman

Abstract

A review of major lines of thinking about developments in the 1980s bearing on the likelihood of a financial crisis in the United States supports four principal conclusions: First, financial crises have historically played a major role in large fluctuations in business activity. A financial crisis has occurred either just prior to, or at the inception of, each of the half dozen or so most severe recorded declines in U.S. economic activity. Second, the proclivity 6f private borrowers to take on debt since 1980 has been extraordinary by postwar standards. Among business corporations, much of the proceeds of this surge in debt issuance has gone to pay down equity (either the borrower's or another company's) rather than to put in place new earning assets. Third, the rate at which U.S. businesses have gone bankrupt and defaulted on their liabilities has also been far out of line with any prior experience since the 1930's. The business failure rate not only rose to a postwar record level during the 1981-82 recession but -- in contradiction to prior cyclical patterns -- continued to rise through the first four years of the ensuing recovery. Fourth, the largest U.S. banks' exposure to debt issued in the course of leveraged buy-outs or other transactions substituting debt for equity capitalization now exceeds their risk-adjusted capital, even with all bank assets (including loans to developing countries) counted at book value. Although this exposure is not (yet) as large as that due to banks' LDC loans, the two sets of risks are not independent. If these trends of the 1980s together comprise an increase in the economy's financial fragility, they increase the likelihood that the government -- including, but not limited to, the Federal Reserve System -- will have to act in its capacity as lender of last resort, and also the likely magnitude of lender-of-last-resort action should such be necessary. If the exercise of this responsibility does become necessary, doing so in a fashion consistent with other Federal Reserve objectives, like maintaining price stability, will be problematic to say the least.

Suggested Citation

  • Benjamin M. Friedman, 1990. "Views on the Likelihood of Financial Crisis," NBER Working Papers 3407, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:3407
    Note: ME
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w3407.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    2. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1, december.
    3. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-276, June.
    4. R. Dan Brumbaugh, JR. & Andrew S. Carron & Robert E. Litan, 1989. "Cleaning Up the Depository Institutions Mess," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1), pages 243-296.
    5. Stephen S. Roach, 1989. "Living with Corporate Debt," Journal of Applied Corporate Finance, Morgan Stanley, vol. 2(1), pages 19-29, March.
    6. N. Gregory Mankiw, 1986. "The Allocation of Credit and Financial Collapse," The Quarterly Journal of Economics, Oxford University Press, vol. 101(3), pages 455-470.
    7. Benjamin M. Friedman & David I. Laibson, 1989. "Economic Implications of Extraordinary Movements in Stock Prices," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(2), pages 137-190.
    8. Jensen, Michael C, 1988. "Takeovers: Their Causes and Consequences," Journal of Economic Perspectives, American Economic Association, vol. 2(1), pages 21-48, Winter.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Khilji, Bashir Ahmad & Farrukh, Muhammad Umer & Iqbal, Mammona & Hameed, Shahzad, 2010. "The Impact of Recent Financial Recession on the Banking sector of Pakistan," MPRA Paper 30558, University Library of Munich, Germany, revised 05 Jan 2011.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Benjamin M. Friedman, 1990. "Implications of Corporate Indebtedness for Monetary Policy," NBER Working Papers 3266, National Bureau of Economic Research, Inc.
    2. Benjamin A. Friedman & E. Gerald Corrigan & Irvine H. Sprague & Norman Strunk & Joseph A. Grundfest, 1991. "The Risks of Financial Crises," NBER Chapters, in: The Risk of Economic Crisis, pages 19-83, National Bureau of Economic Research, Inc.
    3. Mishkin, Frederic S, 1994. "Preventing Financial Crises: An International Perspective," The Manchester School of Economic & Social Studies, University of Manchester, vol. 62(0), pages 1-40, Suppl..
    4. Mark Gertler & R. Glenn Hubbard, 1988. "Financial factors in business fluctuations," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 33-78.
    5. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95, April.
    6. Frederic S. Mishkin, 1999. "International Capital Movements, Financial Volatility and Financial Instability," NBER Working Papers 6390, National Bureau of Economic Research, Inc.
    7. Valentina Aprigliano & Danilo Liberati, 2021. "Using Credit Variables to Date Business Cycle and to Estimate the Probabilities of Recession in Real Time," Manchester School, University of Manchester, vol. 89(S1), pages 76-96, September.
    8. Alexandridis, G. & Antypas, N. & Travlos, N., 2017. "Value creation from M&As: New evidence," Journal of Corporate Finance, Elsevier, vol. 45(C), pages 632-650.
    9. Pamfili Antipa & Vincent Bignon, 2018. "Whither Economic History ?," Working Papers hal-03393148, HAL.
    10. Benmelech, Efraim & Frydman, Carola & Papanikolaou, Dimitris, 2019. "Financial frictions and employment during the Great Depression," Journal of Financial Economics, Elsevier, vol. 133(3), pages 541-563.
    11. Mervyn Allister King, 1993. "Debt Deflation: Theory and Evidence," FMG Discussion Papers dp175, Financial Markets Group.
    12. Goetz, Martin R. & Laeven, Luc & Levine, Ross, 2016. "Does the geographic expansion of banks reduce risk?," Journal of Financial Economics, Elsevier, vol. 120(2), pages 346-362.
    13. Mike Burkart & Konrad Raff, 2015. "Performance Pay, CEO Dismissal, and the Dual Role of Takeovers," Review of Finance, European Finance Association, vol. 19(4), pages 1383-1414.
    14. R. Glenn Hubbard, 1990. "Introduction to "Asymmetric Information, Corporate Finance, and Investment"," NBER Chapters, in: Asymmetric Information, Corporate Finance, and Investment, pages 1-14, National Bureau of Economic Research, Inc.
    15. Koke, Jens, 2002. "Determinants of acquisition and failure: evidence from corporate Germany," Structural Change and Economic Dynamics, Elsevier, vol. 13(4), pages 457-484, December.
    16. Malmendier, Ulrike & Tate, Geoffrey, 2008. "Who makes acquisitions? CEO overconfidence and the market's reaction," Journal of Financial Economics, Elsevier, vol. 89(1), pages 20-43, July.
    17. Basnet, Anup & Davis, Frederick & Walker, Thomas & Zhao, Kun, 2021. "The effect of securities class action lawsuits on mergers and acquisitions," Global Finance Journal, Elsevier, vol. 48(C).
    18. David Margolis, 2006. "Should employment authorities worry about mergers and acquisitions?," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 5(2), pages 167-194, August.
    19. Fratianni, Michele & Giri, Federico, 2017. "The tale of two great crises," Journal of Economic Dynamics and Control, Elsevier, vol. 81(C), pages 5-31.
    20. Edwards, Chase J. & Bendickson, Joshua S. & Baker, Brent L. & Solomon, Shelby J., 2020. "Entrepreneurship within the history of marketing," Journal of Business Research, Elsevier, vol. 108(C), pages 259-267.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:3407. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.