Navigating Financial Crises in the Modern Global Economy
ECON 14/PUBLPOL 14
Stanford University – Department of Economics 
Winter Quarter 2020
Wednesdays 3:30-5:20pm

Ramin Toloui
rtoloui@stanford.edu
SIEPR 231                                                           

DESCRIPTION 
What causes financial crises? What are the keys to anticipating, preventing, and managing disruptions in the global financial system? This course prepares students to navigate future episodes as policymakers, finance professionals, and citizens by going inside the practical decisions made in an unfolding crisis, from the U.S. government and IMF to the boardroom and trading floor. Students will learn warning signs of distress; market structures that govern crisis dynamics; strategic interactions among the key actors; and lessons learned for creating a more resilient system. Concepts will be applied to real-world experiences in emerging market crises, the U.S. housing and global financial crisis, and the European sovereign crisis, as well as prospective risks from China's financial system and unwinding of extraordinary central bank stimulus.

INSTRUCTOR
Prior to Stanford, Toloui had a two-decade career spanning investment management and government. He served as Assistant Secretary for International Finance at the U.S. Treasury Department from 2014-17, where he played a key role in shaping the U.S. government’s approaches to navigating Ukraine’s financial crisis, sanctions on Russia, threats to Eurozone financial stability, Brexit, and China’s market volatility. Before joining Treasury, Toloui was Global Co-Head of Emerging Markets Portfolio Management at PIMCO, directing portfolio strategy and trading for $100 billion in emerging market investments, chairing PIMCO’s Asia-Pacific Portfolio Committee, and serving on PIMCO’s Investment Committee in 2007-8 during the initial stages of the global financial crisis.

REQUIREMENTS 
Students will be expected to complete the required readings (approximately 1-1½ hours per week), complete a weekly online quiz, and participate in classroom discussion. There is no mid-term or final exam.

Satisfactory completion of the course requires a passing grade (average score of 6) on a minimum of 5 multiple-choice quizzes (Weeks 2-5 & Week 7-9), plus mandatory completion of the Week 10 short-response quiz (no exceptions). All quizzes must be completed by the designated deadlines.

***IMPORTANT: No late work will be accepted. Any late submissions will be counted as failed quizzes. No reminders will be sent for missing work, so please set your own reminders to keep track of required submissions.***

OFFICE HOURS
Wednesdays 3:00-4:00pm in SIEPR 231

COURSE SCHEDULE

January 8 
What is a Financial Crisis?
Define what financial crises are and what differentiates them from conventional economic shocks; illustrate the far-reaching impact of financial crises on variables of critical importance to society; provide a roadmap for the course content, and introduce an analytical framework for understanding the origins and dynamics of financial crises.

Required:

· It’s A Wonderful Life(1945). Directed by Frank Capra, bank run scene.

Recommended:

· Semuels, Alana (2017). “The Never-Ending Foreclosure,” The Atlantic, December 1. (Story of the lasting consequences of the housing crisis on an American family.)

· Faiola, Anthony (2002). “Despair in Once-Proud Argentina,” The Washington Post, August 6. (Vivid account of the impact of Argentina's crisis on its society.)

January 15 
The First Financial Crises of the 21^st Century
Analyze episodes in Mexico, Argentina, and Brazil as exemplars of modern financial crises; discuss vulnerabilities and contextual factors that produced financial stress, analyze the policy responses, and assess the consequences.

Required:

· Roubini, Nouriel and Brad Setser (2004). “New Nature of Emerging-Market Crises” in Bailouts or Bail-Ins? Responding to Financial Crises in Emerging Economies, Institute for International Economics, pp. 32-34, 36-42, 44-51.

Recommended:

· Rubin, Robert (2003). In an Uncertain World: Tough Choices from Wall Street to Washington, pp. 3-38. (First-person account of decisionmaking at the US Treasury during the Mexico crisis.)

· Montiel, Peter (2014). “Argentina 2002: Collapse of the Convertibility Plan” in Ten Crises, pp. 230-251. (Interpretive overview of the Argentina crisis.)

· Goldstein, Morris (2003). “Debt Sustainability, Brazil, and the IMF,” Institute for International Economics Working Paper, February, pp. 8-26. (Excellent example of real-time analysis of default probabilities in an ongoing crisis.)

January 22
Understanding Contagion
Examine the Asian Financial Crisis and Russia/Long-Term Capital Management (LTCM) episodes to understand the phenomenon of contagion, and the implications for crisis prevention and management.

Required:

· Claessens, Stijn and Kristin Forbes (2004). “International Financial Contagion: The Theory, Evidence and Policy Implications,” paper for conference “The IMF’s Role in Emerging Market Economies”, November 15, pp. 1-9.

Recommended:

· Blustein, Paul (2001). The Chastening: Inside the Crisis that Rocked the Global Financial System and Humbled the IMF, pp. 1-18. (Insight into early efforts of the IMF to grapple with Asian financial crisis.)

· Dunbar, Nicolas (1999). Inventing Money, pp. 134-141, 147-149, 198-215. (Technical explanation of the mechanics of contagion that propagated Russian volatility to US markets via the hedge fund LTCM.)

· Eichengreen, Barry (1998). “Understanding Asia’s Financial Crisis,” Clement Lecture Series 10, Saint John’s University, November, pp. 1-14. (Synthesis of theory, history, and lessons learned from Asia’s crisis.)

January 29
Governing the Modern Global Economy
Describe the U.S. economic policymaking apparatus (White House, Fed, Treasury, Congress) and international architecture for economic cooperation, particularly in the context of financial volatility and crisis; describe the roles of the International Monetary Fund, G-7, and G-20; discuss the benefits and limits of international cooperation.

Required:

· Mishkin, Frederic (2000). “The International Lender of Last Resort: What Are the Issues?” paper for conference “The World’s New Financial Landscape”, July, pp. 7-19.

Recommended:

· Ries, Philippe (1998). The Asian Storm: Asia’s Economic Crisis Examined, pp. 221-237. (Concise summary of critiques from both left and right of IMF policies and global governance raised by the Asia crisis.)

· Obstfeld, Maurice and Alan Taylor (2017). “International Monetary Relations: Taking Finance Seriously,” Journal of Economic Perspectives, Summer, pp. 3-18. (Brief evolution of global monetary arrangements as relevant to financial stability.)

· Summers, Larry and Matthew Schoenfeld (2012). “The G20 in Retrospect and Prospect,” G20 Mexico, June, pp. 198-199. (Example of how the G20 operates.)

February 5 
Inside Financial Markets
Describe the functioning of modern capital markets, including the evolution from bank- to market-based financing, financial innovation, and the rise of derivatives; characterize the principal-agent problems and other incentive misalignments that affect financial stability; provide an inside view of bond trading and portfolio management during crises.

Required:

· Shah, Sunit (2014), “The Principal-Agent Problem in Finance”, The CFA Institute Research Foundation, pp. 1, 14-25, 31-32.

Recommended:

· “Everything You Need to Know About Bonds,” PIMCO Understanding Investing Series, pp. 1-7. (Simple overview of some fundamental concepts in fixed income portfolio management.)

· Mallaby, Sebastian (2010). More Money Than God: Hedge Funds and the Making of a New Elite, pp. 151-169. (Detailed account of how George Soros and Stan Druckenmiller translated macro views into trading strategies in the 1990s.)

· Scheifer, Andrei and Robert Vishny (1997). “The Limits of Arbitrage,” The Journal of Finance, March, pp. 35-38, 47-49. (Seminal contribution to finance theory that describes factors inhibiting the correction of market mispricings.)

February 12
Global Financial Crisis I: Origins and Causes
Examine the macro and microeconomic backdrop, from the global savings context to the mechanics of U.S. housing finance; characterize the initial crisis stages, particularly the run on the shadow banking system; depict channels of contagion through the broader financial system; evaluate contemporaneous analysis of the unfolding crisis and what analysts missed.

Required:

· Bernanke, Ben (2012). “Some Reflections on the Crisis and the Policy Response,” speech at conference on “Rethinking Finance”, April, pp. 1-17.

Recommended:

· Mian, Atif and Amir Sufi (2014). House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again, pp. 75-105.

· Eisinger, Jesse and Jake Bernstein (2010). “The Magnetar Trade: How One Hedge Fund Helped Keep the Bubble Going,” ProPublica, April 9.

· Rajan, Raghuram (2010). Fault Lines: How Hidden Fractures Still Threaten the World Economy, pp. 134-153.

February 19 
Global Financial Crisis II: Dynamics and Responses
Explain how market infrastructure and strategies of financial actors interacted to govern crisis dynamics, including the nexus among collateral calls, ratings downgrades, and correlated investment strategies; analyze the early policy responses and eventual policy formula of capital injections and stress tests; discuss the imperfect information and decisionmaking under uncertainty that constrains crisis response in both markets and government.

Required:

· Economic Report of the President (2010). U.S. Government Printing Office, February, pp. 47-52, 56-59, 63-66, 68.

Recommended:

· Krishnamurthy, Arvind (2010). “How Debt Markets Have Malfunctioned in the Crisis,” Journal of Economic Perspectives, Winter, pp. 3-27.

· Reinhart, Vincent (2011). “A Year of Living Dangerously: The Management of the Financial Crisis in 2008,” Journal of Economic Perspectives, Winter, pp. 71–88.

· Tarullo, Daniel (2010). “Lessons from the Crisis Stress Tests,” speech at Federal Reserve Board International Research Forum on Monetary Policy, March, pp. 1-11.

February 26 
Europe’s Crises
Describe the origins of the European sovereign debt crisis in 2010-12, including the nexus between sovereign and banking sector risk amplifying crisis dynamics; describe the policy experimentation by the European Central Bank and new European institutions created to respond to the crisis; evaluate the current state of the European integration, including Brexit.

Required:

· Lane, Philip (2012). “The European Sovereign Debt Crisis,” Journal of Economic Perspectives, Summer, pp. 49-65.

Recommended:

· Mody, Ashoka (2018). Euro Tragedy: A Drama in Nine Acts, pp. 233-263.

· Blackstone, Brian and Marcus Walker (2012). “How ECB Chief Outflanked German Foe in Fight for Euro,” Wall Street Journal, October 2.

· de Grauwe, Paul (2013). “Design Failures in the Eurozone – Can They Be Fixed?” European Commission Economic Paper 491, April, pp. 2-30.

March 4 
Preventing and Managing Crises: The Debates on Regulation, Intervention, and Bailouts
Examine the debates over the response to financial crises, including differing perspectives on government intervention and bailouts; assess the initiatives to reform and regulate the global financial system to prevent repeat episodes, including through Dodd-Frank financial reforms and the Financial Stability Board.

Required:

· Geithner, Timothy (2016). “Are We Safer? The Case for Strengthening the Bagehot Arsenal,” Per Jacobsson Lecture, October, pp. 4-8, 14-16, 26-31, 36-37.

Recommended:

· Sykes, Jay (2018). “Regulatory Reform 10 Years After the Financial Crisis: Systemic Risk Regulation of Non-Bank Financial Institutions,” Congressional Research Service Report, April 12, pp. 1-14, 19-38, 44-49.

· Warren, Elizabeth (2015). “The Unfinished Business of Financial Reform,” Remarks at the Levy Institute’s 24th Annual Hyman P. Minsky Conference, April 15, pp. 1-10.

· Wallison, Peter (2016). “How Dodd-Frank Damaged Community Banks and Hurt Small Businesses,” Remarks at the Center of the American Experiment, p. 1-8.

March 11
Navigating the Crises of the Future
Review the key learning objectives of the course; compile a practical roadmap that students can use to identify and navigate future financial disruptions as economic policymakers, investors, and executives.