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A Crash Course on Crises: Macroeconomic Concepts for Run-Ups, Collapses, and Recoveries
An incisive overview of the macroeconomics of financial crises—essential reading for students and policy experts alike
With alarming frequency, modern economies go through macro-financial crashes that arise from the financial sector and spread to the broader economy, inflicting deep and prolonged recessions. A Crash Course on Crises brings together the latest cutting-edge economic research to identify the seeds of these crashes, reveal their triggers and consequences, and explain what policymakers can do about them.
Each of the book’s ten self-contained chapters introduces readers to a key economic force and provides case studies that illustrate how that force was dominant. Markus Brunnermeier and Ricardo Reis show how the run-up phase of a crisis often occurs in ways that are preventable but that may go unnoticed and discuss how debt contracts, banks, and a search for safety can act as triggers and amplifiers that drive the economy to crash. Brunnermeier and Reis then explain how monetary, fiscal, and exchange-rate policies can respond to crises and prevent them from becoming persistent.
With case studies ranging from Chile in the 1970s to the COVID-19 pandemic, A Crash Course on Crises synthesizes a vast literature into ten simple, accessible ideas and illuminates these concepts using novel diagrams and a clear analytical framework.
With alarming frequency, modern economies go through macro-financial crashes that arise from the financial sector and spread to the broader economy, inflicting deep and prolonged recessions. A Crash Course on Crises brings together the latest cutting-edge economic research to identify the seeds of these crashes, reveal their triggers and consequences, and explain what policymakers can do about them.
Each of the book’s ten self-contained chapters introduces readers to a key economic force and provides case studies that illustrate how that force was dominant. Markus Brunnermeier and Ricardo Reis show how the run-up phase of a crisis often occurs in ways that are preventable but that may go unnoticed and discuss how debt contracts, banks, and a search for safety can act as triggers and amplifiers that drive the economy to crash. Brunnermeier and Reis then explain how monetary, fiscal, and exchange-rate policies can respond to crises and prevent them from becoming persistent.
With case studies ranging from Chile in the 1970s to the COVID-19 pandemic, A Crash Course on Crises synthesizes a vast literature into ten simple, accessible ideas and illuminates these concepts using novel diagrams and a clear analytical framework.
- GenresEconomics
136 pages, Hardcover
Published June 6, 2023
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Displaying 1 - 10 of 10 reviews
January 28, 2024
A useful summary and exposition of modern the modern macro-financial approach to crises which are a combination of financial crisis and macroeconomic recession.
The book is organized around ten ideas about how fragilities grow (e.g., modern banks), how they get triggered and spread (e.g., amplification and contagion), and the macroeconomic policy response (exchange rate, monetary and fiscal). For each idea it sketches the main points—often with the help of a simple graphical model—and then provides two case studies to illustrate the idea mostly drawing on events in the last quarter century (East Asian crisis, euro zone, financial crisis in the United States, Greece, etc.) but a few older ones sprinkled in (Germany in the 1930s and the Great Depression).
Useful for classes that cover these topics or for people that regularly engage in macro-financial issues but want to add a little more rigor and linkages to the standard news discussions.
The book is organized around ten ideas about how fragilities grow (e.g., modern banks), how they get triggered and spread (e.g., amplification and contagion), and the macroeconomic policy response (exchange rate, monetary and fiscal). For each idea it sketches the main points—often with the help of a simple graphical model—and then provides two case studies to illustrate the idea mostly drawing on events in the last quarter century (East Asian crisis, euro zone, financial crisis in the United States, Greece, etc.) but a few older ones sprinkled in (Germany in the 1930s and the Great Depression).
Useful for classes that cover these topics or for people that regularly engage in macro-financial issues but want to add a little more rigor and linkages to the standard news discussions.
June 18, 2023
Cliff notes — A Crash Course on Crises (Markus K. Brunnermeier, Ricardo Reis)
Macro-financial crises originate or are amplified by financial markets and have serious macroeconomic effects. Understanding, and ideally remedying, them requires a solid account of interactions between macro and financial policy. Brunnermeier and Reis condense some thinking in that intersection into perhaps the shortest economics book I’ve ever read. It’s almost too short — something that the authors claim as an objective — but serves as a great refresher or entry-point into the literature. I agree with the authors: this one is for the upper-level undergraduates, Masters (and pre-qual PhD) students, and the professional economist.
The book is split into three parts. First, risks built in the run-ups to crises: speculative bubbles, capital inflows and misallocation, and “modern” (marked-to-market and wholesale-funding-and-securitisation-powered) banking. Second, triggers and amplifiers of a crash: contagion and instability (strategic complementarities, multiple equilibria), the inevitable elision of solvency and liquidity, public-private doom loops, and risk-off flights to safety. Third, policies and recoveries: exchange rate policies, unconventional monetary policy, and fiscal policy.
If any of that interests you, I recommend that you read this book. There’s almost no point of me summarising any of it here because the authors have done such an excellent job of compression. Though, if you’d indulge, I’ll continue with a few thoughts I had. Feel free to stop reading here.
I thought the chapter on capital misallocation was excellent. There are some fairly clear links here with development economics and the general East Asian success stories. That is: the traded sector is more productive, subject to global competition. So encourage that instead of politically connected non-tradeable firms.
The chapter on modern banking is also well worth reading. A reliance on wholesale funding instead of just deposits and equity, and a traceable balance sheet (securitisation) makes the whole edifice riskier (and subject to contagion via strategic complementarities). Wholesale funding (short-term interbank and repo — collateralised) being effectively senior to deposits exposes the whole edifice again to political and legitimacy risks.
Distinguishing between solvency and liquidity in real-time is basically impossible. Another source of legitimacy risk, though once the dust settles.
Capital controls and exchange rate intervention probably a good thing when you have a lot of hot money sloshing around and a lot of foreign-denominated debt on banks’ balance sheets.
Unconventional policy and reserve satiation requiring central bank balance sheets to be huge means they now make large gains and losses in the conduct of policy. This can mean risks for independence because the link with fiscal authorities (via dividends) is more important. That said, the goal of a central bank is not to make profit, so perhaps this is a communication issue?
Fiscal authorities have meaningful effects on the equilibrium real interest rate (this is uncontroversial, but worth writing down).
Macro-financial crises originate or are amplified by financial markets and have serious macroeconomic effects. Understanding, and ideally remedying, them requires a solid account of interactions between macro and financial policy. Brunnermeier and Reis condense some thinking in that intersection into perhaps the shortest economics book I’ve ever read. It’s almost too short — something that the authors claim as an objective — but serves as a great refresher or entry-point into the literature. I agree with the authors: this one is for the upper-level undergraduates, Masters (and pre-qual PhD) students, and the professional economist.
The book is split into three parts. First, risks built in the run-ups to crises: speculative bubbles, capital inflows and misallocation, and “modern” (marked-to-market and wholesale-funding-and-securitisation-powered) banking. Second, triggers and amplifiers of a crash: contagion and instability (strategic complementarities, multiple equilibria), the inevitable elision of solvency and liquidity, public-private doom loops, and risk-off flights to safety. Third, policies and recoveries: exchange rate policies, unconventional monetary policy, and fiscal policy.
If any of that interests you, I recommend that you read this book. There’s almost no point of me summarising any of it here because the authors have done such an excellent job of compression. Though, if you’d indulge, I’ll continue with a few thoughts I had. Feel free to stop reading here.
I thought the chapter on capital misallocation was excellent. There are some fairly clear links here with development economics and the general East Asian success stories. That is: the traded sector is more productive, subject to global competition. So encourage that instead of politically connected non-tradeable firms.
The chapter on modern banking is also well worth reading. A reliance on wholesale funding instead of just deposits and equity, and a traceable balance sheet (securitisation) makes the whole edifice riskier (and subject to contagion via strategic complementarities). Wholesale funding (short-term interbank and repo — collateralised) being effectively senior to deposits exposes the whole edifice again to political and legitimacy risks.
Distinguishing between solvency and liquidity in real-time is basically impossible. Another source of legitimacy risk, though once the dust settles.
Capital controls and exchange rate intervention probably a good thing when you have a lot of hot money sloshing around and a lot of foreign-denominated debt on banks’ balance sheets.
Unconventional policy and reserve satiation requiring central bank balance sheets to be huge means they now make large gains and losses in the conduct of policy. This can mean risks for independence because the link with fiscal authorities (via dividends) is more important. That said, the goal of a central bank is not to make profit, so perhaps this is a communication issue?
Fiscal authorities have meaningful effects on the equilibrium real interest rate (this is uncontroversial, but worth writing down).
March 28, 2024
This book was obviously very good, but at the risk of being a smart-ass, my general meta-skepticisms of the methodology of reverse-engineering previous crises ex post remain. It's super easy to justify any model or theory in hindsight - what's stopping you from fitting your model to the data, instead of building one based on solid economic theory and then seeing if it fits the real world? Then there's the general skepticism of whether past crises can even tell us anything particularly crucial, given that ex ante black swans are unknowable. (That's a rlly smart-ass take tho) Well tbf we can rlly observe how policymakers learned a lot from history and how that knowledge rlly helped us - Bernanke immediately committed to Bagehot's dictum during the GFC, the Fed saving the Treasury market during Covid and lent generously, even becoming the buyer of last resort. But often times, solving one problem (using historical evidence) creates a new problem - the Covid-era QE that was arguably excessive as observed by the subsequent inflation that's still fucking us now. What with Powell's 'transitory inflation' BS.
Finance cannot be separated from macroeconomics, that's for sure, given the increasingly linkages and vulnerabilities in modern banks as identified in the book. In fact I had neglected my macro for nearly a year (after seriously buying into the value investor dogma/ BS of 'don't try to forecast macro. Just focus on bottom-up research'), and spent my time on fundamental analysis and finance for a long time, until an extremely good course in asset pricing re-ignited my interest in macro, weirdly enough. Finance (those taught at good econ depts) is essentially applied micro, however this branch of micro can be so satisfyingly applied to macro. Macro-finance seems to be a very good, intriguing field to specialize in.
Finally, I found the general discussion of bubbles and the authors' general advice that policy should lean against bubbles .... unsettling. I certainly do believe bubbles exist (not inconsistent with rational finance. For example, (Xiong & Scheinkman 2003) showed a very interesting model imo that likened emergent technologies (those that are obvs very susceptible to bubbles e.g., crypto, the dot com boom etc) with a call option, that's propagated by limits to arb (i.e., short-selling constraints) and disagreement, even by informed parties. The value of an option is positively related with Vol, thus when there's high disagreement i.e., high vol, the asset price inflates like fuck because no one can short it. I like this strand of literature.) However, even after decades of behavioural finance work, there's no way of systematically identifying bubbles ex ante, which is my biggest criticism, which I share with Gene Fama. You can only identify a bubble ex post, i.e., AFTER it has popped so what's the fucking point? All these nice little theories, intriguing books like 'Manias, Panics, and Crashes' - they're all just anecdotes. 'It takes a theory to beat a theory' - Andrew Lo. Without a systematic method to lean against bubbles, this work can only remain unsatisfying.
Finally, I'm confused at the agenda of this book. I listened to Ricardo Reis on the Macro Musings podcast and he said this book addressed a gap in the existing textbooks on macro-finance. However, very little here is new. Several models here e.g., multiple equilibria were even in my 1st-year econ textbook. The many case studies of Covid were also nice. It's quite exhilarating these days as I'm old enough where many case studies are events that I've actually lived through and have formed my own views on, in real time e.g., Covid, QT, recent yield curve inversions. Whereas a few years ago when I was 18, many case studies were on butt-fuck events that happened decades b4 I was born, or have a memory on e.g., Asian Financial Crisis, GFC, Great Depression etc.
The authors have claimed success, because the goal which they set for themselves in the intro - that 'the more curious reader reach the end not fully satisfied', has been achieved.
Finance cannot be separated from macroeconomics, that's for sure, given the increasingly linkages and vulnerabilities in modern banks as identified in the book. In fact I had neglected my macro for nearly a year (after seriously buying into the value investor dogma/ BS of 'don't try to forecast macro. Just focus on bottom-up research'), and spent my time on fundamental analysis and finance for a long time, until an extremely good course in asset pricing re-ignited my interest in macro, weirdly enough. Finance (those taught at good econ depts) is essentially applied micro, however this branch of micro can be so satisfyingly applied to macro. Macro-finance seems to be a very good, intriguing field to specialize in.
Finally, I found the general discussion of bubbles and the authors' general advice that policy should lean against bubbles .... unsettling. I certainly do believe bubbles exist (not inconsistent with rational finance. For example, (Xiong & Scheinkman 2003) showed a very interesting model imo that likened emergent technologies (those that are obvs very susceptible to bubbles e.g., crypto, the dot com boom etc) with a call option, that's propagated by limits to arb (i.e., short-selling constraints) and disagreement, even by informed parties. The value of an option is positively related with Vol, thus when there's high disagreement i.e., high vol, the asset price inflates like fuck because no one can short it. I like this strand of literature.) However, even after decades of behavioural finance work, there's no way of systematically identifying bubbles ex ante, which is my biggest criticism, which I share with Gene Fama. You can only identify a bubble ex post, i.e., AFTER it has popped so what's the fucking point? All these nice little theories, intriguing books like 'Manias, Panics, and Crashes' - they're all just anecdotes. 'It takes a theory to beat a theory' - Andrew Lo. Without a systematic method to lean against bubbles, this work can only remain unsatisfying.
Finally, I'm confused at the agenda of this book. I listened to Ricardo Reis on the Macro Musings podcast and he said this book addressed a gap in the existing textbooks on macro-finance. However, very little here is new. Several models here e.g., multiple equilibria were even in my 1st-year econ textbook. The many case studies of Covid were also nice. It's quite exhilarating these days as I'm old enough where many case studies are events that I've actually lived through and have formed my own views on, in real time e.g., Covid, QT, recent yield curve inversions. Whereas a few years ago when I was 18, many case studies were on butt-fuck events that happened decades b4 I was born, or have a memory on e.g., Asian Financial Crisis, GFC, Great Depression etc.
The authors have claimed success, because the goal which they set for themselves in the intro - that 'the more curious reader reach the end not fully satisfied', has been achieved.
August 10, 2023
Very concise and short, yet thorough and detailed explanations of macro-financial concepts and policy solutions. The efficacy is remarkable. However, the book requires understanding of some basic economic concepts.
August 19, 2023
An extremely concise guide and intro to the modern area of research into macro-financial crises that developed around and after the financial crisis of 2008 and the subsequent Euro crisis, excerpted and simplified down to the undergraduate level. The chapters were developed, and I suspect would work best as, supplemental lectures for an intermediate or advanced undergraduate macroeconomics class, to bring some of the models and ideas from this literature into contemporary teaching. In cases where the key idea can be explained diagrammatically, it works quite well, as in the chapters on interest and exchange rates, but in some of the chapters the simplification becomes so vague as to render the modeling unhelpful. A few chapters are in-between: the chapter on bubbles offers a simplified model in between a classic Keynesian beauty contest and (perhaps unsurprisingly, given the author) the Abreu-Brunnermeier formalization of the "greater fool" theory that probably gives a more empirically relevant perspective than, for example, the transversality violation approach seen in much of the academic literature, but in so doing slightly hand-waves at the mechanics of the process. Along with these models or pieces of models, the narrative components offer context and add up to a reasonable if somewhat disjointed history of some of the major crises of the past two decades.
It is clear how much effort was put into crafting these capsule summaries and descriptions; I often found that the precise wording of sentences was tailored to convey a concept concisely while making sure not to omit particular points of fact or theoretical concern in the academic literature. My sense is that this approach is not likely to convey these nuances to the typical undergraduate reader, who will mostly perceive it as a slightly stilted writing style and escape with just a vague sense of the main points intact. I understand the academic compulsion for accuracy and completeness combined with the constraints of undergraduate class schedules that leads to this kind of oblique prose, but I do worry about the kind of misconceptions that can arise in non-specialist readers from hiding away details on potentially controversial topics in an awkward sentence construction. For the most part these references are kept to fairly mainstream ideas among academic specialists, but an introductory reader wouldn't have the paper trail to make their own evaluations.
Overall, I think this book is likely to be very good for the use for which it was created, as a selection of supplementary lectures from which one can pick and choose to add to a class. As a whole, it needs some additional filler to hang together, so a reader looking to get into the topic should probably use it as a secondary rather than a primary book, perhaps along with some of the more narrative accounts of recent crises. Among other things, this would make clear the interconnections between the ideas described in the separate chapters, as well as the diversity of crises, which tend not to follow a single structure but instead incorporate distinct subsets of the mechanisms described.
It is clear how much effort was put into crafting these capsule summaries and descriptions; I often found that the precise wording of sentences was tailored to convey a concept concisely while making sure not to omit particular points of fact or theoretical concern in the academic literature. My sense is that this approach is not likely to convey these nuances to the typical undergraduate reader, who will mostly perceive it as a slightly stilted writing style and escape with just a vague sense of the main points intact. I understand the academic compulsion for accuracy and completeness combined with the constraints of undergraduate class schedules that leads to this kind of oblique prose, but I do worry about the kind of misconceptions that can arise in non-specialist readers from hiding away details on potentially controversial topics in an awkward sentence construction. For the most part these references are kept to fairly mainstream ideas among academic specialists, but an introductory reader wouldn't have the paper trail to make their own evaluations.
Overall, I think this book is likely to be very good for the use for which it was created, as a selection of supplementary lectures from which one can pick and choose to add to a class. As a whole, it needs some additional filler to hang together, so a reader looking to get into the topic should probably use it as a secondary rather than a primary book, perhaps along with some of the more narrative accounts of recent crises. Among other things, this would make clear the interconnections between the ideas described in the separate chapters, as well as the diversity of crises, which tend not to follow a single structure but instead incorporate distinct subsets of the mechanisms described.
June 28, 2023
+ A major complaint about the field of macroeconomics in the slipstream of the 2008 financial crisis was that it hadn't paid enough attention to the role of financial markets in macroeconomics. This book tries to fill that gap with 10 or so short, largely independent chapters each covering a particular idea/graph/development both theoretically and with some nice (and sometimes very recent) case studies.
- It's quite dry and technical. I think it's quite optimistic to think this is a book for 'policymakers and members of the informed public'. Quite a lot of macroeconomic background is assumed. Additionally, in my e-version (straight from the publisher so I had to use their proprietary ereader-app) the graphs were too small to be of use and there wasn't a clear way to get them bigger; no zoom or anything. This really hindered me in getting the most out of the book. It was actually quite frustrating.
- It's quite dry and technical. I think it's quite optimistic to think this is a book for 'policymakers and members of the informed public'. Quite a lot of macroeconomic background is assumed. Additionally, in my e-version (straight from the publisher so I had to use their proprietary ereader-app) the graphs were too small to be of use and there wasn't a clear way to get them bigger; no zoom or anything. This really hindered me in getting the most out of the book. It was actually quite frustrating.
January 8, 2024
The authors are accomplished economists, whose knowledge in this subject area is unquestioned. As a result, their presentations and the quick-fire graphical models employed to support their conclusions are sound and understood, depending on the reader. Hence, my rating of three stars, which reflects my consistent criticism of books of this kind, namely for the experienced reader in the field there is no reason to read the book ( not enough substance to provoke a debate) and for the inexperienced reader they will finish the book having turned all the pages without really having understood what they have read. There are many more substantive books on the topic area at the multiple knowledge levels that warrant space on your book shelf.
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July 20, 2023
I expected something a bit deeper, or, at least, a richer set of references - while it is still too dense for the uninitiated. As such, quite hard to figure out the readership the authors had in mind.
December 11, 2023
Covers the common causes of economic crises and examples. The explanations (both written and mathematical) come off as a bit surface level and the book fails to go into enough detail to be considered insightful. Some of the examples are unique and not the stock situation for the crisis cause.
December 29, 2023
Highly readable theoretical exposition linking the study of macroeconomics and financial crises. Explains how macro-financial crises, such as what happened in the U.S. from 2008-2012, are different from, and more severe than, run-of-the-mill recessions. Highly relevant for the moment and presented in a very accessible, though still sophisticated, manner.
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