Leverage and Asset Bubbles: Averting Armageddon with Chapter 11?
29 Pages Posted: 5 Apr 2010 Last revised: 22 Mar 2023
There are 2 versions of this paper
Leverage and Asset Bubbles: Averting Armageddon with Chapter 11?
Leverage and Asset Bubbles: Averting Armageddon with Chapter 11?
Date Written: March 2010
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.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Managing Credit Booms and Busts: A Pigouvian Taxation Approach
By Olivier Jeanne and Anton Korinek
-
Managing Credit Booms and Busts: A Pigouvian Taxation Approach
By Olivier Jeanne and Anton Korinek
-
Managing Credit Booms and Busts: A Pigouvian Taxation Approach
By Olivier Jeanne and Anton Korinek
-
Overborrowing and Systemic Externalities in the Business Cycle
-
Systemic Risk-Taking: Amplification Effects, Externalities, and Regulatory Responses
-
Systemic Risk-Taking: Amplification Effects, Externalities, and Regulatory Responses
-
Real Exchange Rate Volatility and the Price of Nontradables in Sudden-Stop-Prone Economies