Financial Crises
Course facts
- Payment: Free, no certificate
- Credits: Non Credit
- Learning style: Self-paced, start anytime
- Resources: Exams; Lecture Notes
- Before you start: 18.01 Single Variable Calculus; 14.02 Principles of Macroeconomics
MIT OpenCourseWare details
- As taught in: January IAP 2016
- Department: Economics
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Economic theories of financial crises: leverage, fire sales, bank runs, liquidity, moral hazard, contagion and the regulation of the financial system.
Why do some financial shocks spiral into full-blown crises? This short course introduces the economic theories that explain it, focusing on the amplification mechanisms that make crises worse: leverage, fire sales, bank runs, interconnections and complexity. It weighs competing views of where crises come from, mistaken beliefs or moral hazard, and asks how the financial system should be regulated, using economic theory and evidence from crises around the world, especially the subprime crisis.
What You Will Achieve
- Explain how borrowing constraints and net worth amplify financial shocks
- Analyze how leverage and fire sales spread losses through markets
- Describe how maturity mismatch leads to bank runs and flight to quality
- Evaluate policies that aim to mitigate or prevent financial crises
Program Overview
Lessons from History and Balance Sheets
What past crises show, and how losses get amplified.
- Understanding financial crises: lessons from history
- Borrowing constraints and the net worth channel
- Leverage, fire sales and amplification
Banks, Liquidity and Panics
Where bank losses come from and why runs happen.
- Banks’ losses: moral hazard or mistakes
- Maturity mismatch and banking panics
- Debt, panics and flight to quality
Contagion and Policy
How crises spread, and what policy can do.
- Interconnections and complexity
- Optimal policy to mitigate or prevent crises
Course Completion
Job Outlook
This understanding is used in central banking, financial regulation, risk management and economic research on financial stability.
Good for: Economics students and finance readers who want the theory behind bank runs, fire sales and the subprime crisis.
Keep in mind: A four-week January 2016 mini-course: eight lectures of notes and one final exam, with no required textbook; its recent example is the subprime crisis.
Bottom line: A compact, theory-led tour of how financial crises amplify and what regulation can do about them.
Frequently Asked Questions
What is the final exam based on?
Chapter 12 of Ben S. Bernanke's memoir The Courage to Act: A Memoir of a Crisis and Its Aftermath, published in 2015.
Does it explain bank runs?
Yes. Two lectures on liquidity cover maturity mismatch and banking panics, then debt, panics and the flight to quality.
Why is the course so short?
It ran during MIT's Independent Activities Period, a special four-week term in January, so it has eight lectures rather than a full semester.
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