Money, Banking, and Financial Markets

Understand the principles, understand the future

If you haven’t seen The Big Short, you should. The acting is superb and the story enlightening: a few brilliant outcasts each discover just how big the holes are that eventually bury the U.S. financial system in the crisis of 2007-2009. If you’re like most people we know, you’ll walk away delighted by the movie and disturbed by the reality it captures. [Full disclosure: one of us joined a panel organized by the film’s economic consultant to view and discuss it with the director.]

But we're not film critics, The moviealong with some misleading criticismprompts us to clarify what we view as the prime causes of the financial crisis. The financial corruption depicted in the movie is deeply troubling (we've written about fraud and conflicts of interest in finance here and here). But what made the U.S. financial system so fragile a decade ago, and what made the crisis so deep, were practices that were completely legal. The scandal is that we still haven't addressed these properly....


Narayana Kocherlakota, Lionel W. McKenzie Professor of Economics, University of Rochester; former President, Federal Reserve Bank of Minneapolis.

Has the experience of the crisis changed your view of the central bank policy toolkit?

Former President Kocherlakota: Yes. I’m going to focus on the U.S. experience—with which I am most familiar—aside from one comment later that relates to Europe.

I would divide the U.S. response to the crisis into two pieces. One is the liquidity interventions that the Federal Reserve undertook, largely under the rubric of Section 13(3) of the Federal Reserve Act, beginning in 2008 and then moving on into the fall of 2008 and 2009. I was not President of FRB Minneapolis yet, so my comments are really those of an economist observing those interventions from the outside....

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... the site where you can learn about finance and economics. We provide commentary on events in the news and on questions of more lasting interest. Because the financial system is constantly evolving, our analysis is informed by a set of core principles: understand the principles, understand the future. The opening excerpts of our two most recent posts appear above. For prior posts, click on the Commentary link to the left, or on the month-by-month Archives to the right. Alternatively, if you are interested in a specific topic, use the tags.

The site also provides material related to our textbook, Money, Banking and Financial Markets, 4th edition, 2014. The Five Core Principles on which the book is based are highlighted here. In addition, Cecchetti and Schoenholtz 4e systematically integrates the use of economic and financial data from FRED, the online database provided by the Federal Reserve Bank of St. Louis. Click on FRED Lessons on the left to access help on how to use this incredible resource.

Steve Cecchetti and Kim Schoenholtz


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