How to learn more about credit booms and financial crises

Here are your notes.
Here are your notes.
Image: Reuters/Jason Lee
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If you want to learn more about the arguments and data I explored in the State of Play, a solid starting point is the Bank for International Settlements website. To begin your data spelunking, your cave entrance is the BIS statistics page, which offers several interfaces for finding and organizing the data, as well as a list of the latest data releases. I like the Statistics Warehouse best; it lets you customize your data search and tweak the variables with dropdown menus as you go along. Plus, you can save the link to previous queries, making for easier updating of charts. Data series you can choose from include credit (volumes and share of GDP), global liquidity (by major currency), debt service ratios, foreign exchange rates, central bank interest rates, consumer price inflation, and home prices (among other things). Most include data for a few-dozen countries; some series go as far back as 1952.

Some of the data are more self-explanatory than others. One of the more confusing datasets is that for cross-border bank lending (which is useful for trying to get a handle how much foreign currency-denominated debt a country’s residents have borrowed). Fortunately, the BIS researchers sometimes write detailed explanations of how to understand and interpret the data—like this one on Turkey’s foreign lenders.

That’s great if you know what you’re looking for. Another fun way to spiff up your chart collection is to rummage through past annual and quarterly reports. See a graph you like? Click the download button in its lower right-hand corner and you get whisked away to a page of Excel file downloads for every graph and table in the entire report!

The advantage of using the Explorer interface (as opposed to the Warehouse) is a function that lets you see view the historical data via an “interactive” visualization page (for example, emerging market US dollar-debt, or Australian home prices). (A superior option if you don’t want to toggle back and forth between the BIS site and a separate spreadsheet.)

The best place to find data on financial crises throughout history (that I managed to find—would love any suggestions!) is the site Harvard economist Carmen Reinhart maintains for the data used in This Time Is Different, the 2009 book she wrote with fellow Harvard economist Ken Rogoff. For example, here’s a really basic chart I made using her data to get a sense of the changing incidence of banking crises over the last couple centuries. But there’s a lot more fun stuff in there to play around with.

Finally, anyone interested in digging deeper into US household balance sheet dynamics that I covered in the essay, the Federal Reserve Bank of New York has great quarterly data on US household and consumer debt. For corporate debt data, the most convenient cache of statistics is maintained through the Federal Reserve Bank of St. Louis’ FRED. You can find that same data directly through the Federal Reserve’s quarterly release of the complete US financial accounts too. Unfortunately, I have yet to find public sources of detailed data on investment-grade bonds or leveraged loans.

As for reading more on the topics discussed, the BIS site is, again, a good place to start. The quarterly and annual reports are written clearly with only a thin layer of econo-jargon. The introductory remarks give a good overview of what markets have been doing and put them in the larger context of what’s been going on globally with risk perceptions and credit availability. In other words, for people who aren’t inclined to follow markets actively—and even for those who are—it’s a nice cushion against the whiplash of daily “OMG the [____ index/market] is [crashing/surging]” headlines. Speeches also tend to be on the more accessible side. I recommend reading commentary by Claudio Borio and Hyun Song Shin in particular.

A couple levels up in complexity is the BIS selection of paper in peer-reviewed journals and in-house working papers. These tend to be on the more technical side of an already wonky spectrum (it is, for instance, a very specific itch that “Why you should use the Hodrick-Prescott filter—at least to generate credit gaps” aims to scratch). Still, for anyone interested in learning more about the arguments and empirical research underlying some of the topics in the State of Play, a good rummage through BIS research will be rewarding. (It may also turn up some unexpected nuggets like economist Thomas Philippon on the opportunity for technology to bring down the surprisingly high costs of financial services, or “Family first? Nepotism and corporate investment,” which seems intriguingly relevant. There are also an increasing number of studies on cryptocurrency, if that’s your thing—like the timely lessons from the Kipper- und Wipperzeit crisis during the Thirty Years War.)

As for book-learning, start with Charles Kindleberger’s Manias, Panics, and Crashes. It’s hard to beat learning about seemingly abstruse economic concepts like, say, “’cobweb’ responses to exogenous shocks” through the vignette about an outbreak of vineyard lice in France that led to an 1880s IPO bonanza for Guinness and other British breweries. Indeed, the writing is so colorful (“A housing boom in Houston is an oil boom in drag”) that you barely notice you’re absorbing Kindleberger’s framework for understanding sequences of financial crises. I also highly recommend A Financial History of Western Europe.

Michael Pettis’ work is what introduced me to these issues—as well as to Kindleberger and Minsky—a decade ago. He’s written numerous books and maintains a highly insightful blog, which focuses a lot on China (Pettis lives in Beijing). I recommend reading The Volatility Machine, which offers a rich history of credit expansion episodes since the 1800s, after or alongside Manias, Panics, and Crashes.

As for Hyman Minsky, the thing to read is Can “It” Happen Again? Essays on Instability and Finance. Anyone yearning for an estate sale-like hodgepodge of Minsky thinking should try the digital Minsky archive at Bard University. There’s a lot of random stuff in there, but it’s mostly interesting (and every once in a while you end up coming across a scanned hand-scrawled notes of his).

To understand more about balance-sheet recessions, the place to start is the pioneer of the concept, Japanese (by Taiwanese extraction) economist Richard Koo—specifically, his Balance Sheet Recession: Japan’s Struggle with Uncharted Economics and Its Global Implications and The Holy Grain of Macroeconomics: Lessons from Japan’s Great Recession. Some more entertaining books about Japan’s bubble are The Real Price of Japanese Money by R. Taggart Murphy; Saving the Sun by Gillian Tett; and The Bubble Economy by Christopher Wood.

For more generally related reading, Roger Lowenstein’s When Genius Failed, about the rise and fall of Long Term Capital Management in the mid-1990s, captures the mid-1990s zeitgeist. John Kay’s Other People’s Money covers the liberalization of finance and capital flows in detail while still being highly readable. Finally, Adam Tooze’s new book Crashed is an excellent way to understand the global capital flows that connect the US housing market crash, the euro crisis, and the current state of politics around the world.