The Financial System in Extremis

Course Number 1405

Visiting Professor Jeremy Stein (Harvard Economics Department)
Winter; Q3; 1.5 credits
14 sessions
Paper
Enrollment: Limited to 45 students

This course will use the global financial crisis that began in 2007 as a vehicle to study the nature of the modern financial system. Particular emphasis will be given to: i) the interplay between a variety of institutions and markets (e.g., banks, broker-dealers, hedge funds, money-market funds, and the repo and derivatives markets); ii) the resulting fragility and potential for systemic risk; and iii) the ongoing roles of financial innovation and regulation in shaping the evolution of the system. The course will rely heavily on conceptual tools from corporate and behavioral finance, including theories of bank runs, fire sales, and asset-market bubbles.

Career Focus

The course is primarily intended for students who plan to pursue a career in the financial services industry, especially those who want to better understand the industry, its underlying economics, and its risks, from a broad systemic perspective. It should also be useful for those who want to gain some insight into the increasingly high-stakes interaction between private-sector financial firms and government regulators and policymakers.

Course Organization

The course will be organized around four modules. Module I, "Prelude", will examine the buildup to the crisis: the macroeconomic environment in the early and mid 2000s; the housing/subprime bubble; and innovations in structured finance. Module II, "The Crisis Unfolds", will focus in detail on events in markets from July 2007 through the bankruptcy of Lehman Brothers in September of 2008. Module III, "Whatever it Takes?" will analyze the various components of the government's policy response, including the TARP, the stress tests, and the Federal Reserve's many programs. Module IV, "The Future of the Financial System" will look at coming changes in the financial landscape, with an eye to understanding the challenges facing regulators, as well as the implications for how private firms are likely to adapt and evolve-both to the new rules of the game and to the lessons learned from the crisis itself.

Course Framework

The materials for the course will consist largely of my lecture notes and a variety of background readings, as opposed to case studies. However, I will do my best to make the lectures highly interactive, and to encourage this process, class participation will account for 75% of the final grade. The other 25% will be based on a short final essay of approximately 10 pages.