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Leverage and asset bubbles: averting armageddon with chapter 11?

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Miller, Marcus and Stiglitz, Joseph (2010) Leverage and asset bubbles: averting armageddon with chapter 11? Economic Journal, Vol.120 (No.544). pp. 500-518. doi:10.1111/j.1468-0297.2010.02357.x

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Abstract

An iconic model with high leverage and overvalued collateral assets is used to illustrate the amplification mechanism driving asset prices to 'overshoot' equilibrium when an asset bubble bursts - threatening widespread insolvency and what Richard Koo calls a 'balance sheet recession'. Besides interest rates cuts, asset purchases and capital restructuring are key to crisis resolution. The usual bankruptcy procedures for doing this fail to internalise the price effects of asset 'fire-sales' to pay down debts, however. We discuss how official intervention in the form of 'super' Chapter 11 actions can help prevent asset price correction causing widespread economic disruption.

Item Type: Journal Article
Subjects: H Social Sciences > HC Economic History and Conditions
Divisions: Faculty of Social Sciences > Centre for the Study of Globalisation and Regionalisation
Journal or Publication Title: Economic Journal
Publisher: Wiley-Blackwell Publishing Ltd.
ISSN: 0013-0133
Official Date: May 2010
Dates:
DateEvent
May 2010Published
Volume: Vol.120
Number: No.544
Number of Pages: 19
Page Range: pp. 500-518
DOI: 10.1111/j.1468-0297.2010.02357.x
Status: Peer Reviewed
Publication Status: Published
Access rights to Published version: Restricted or Subscription Access
Description:

Also circulated as CEPR discussion paper no.DP7469 and NBER working paper no.15817.
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