Understanding the Recent Financial Market Turmoil

Myron Scholes Global Markets Forum

September 25, 2007, 5:30–7:30 P.M.

John H. Cochrane, Myron S. Scholes Professor of Finance
Anil Kashyap, Edward Eagle Brown Professor of Economics and Finance
Raghuram G. Rajan, Eric J. Gleacher Distinguished Service Professor of Finance

A year before the bailouts of September and October 2008, faculty from the University of Chicago Booth School of Business offered competing views on the unfolding subprime mortgage crisis. John H. Cochrane said that many financial firms had managed liquidity risk poorly by not anticipating how illiquid securities could become when everyone wanted to sell at once. But, he argued, investors would learn from their mistakes unless a bailout warped future incentives. Raghuram G. Rajan countered that the asymmetry of policy regarding liquidity—policymakers want to do nothing in good times, but markets collapse if they don’t intervene in bad ones—makes it hard for governments to avoid this trap. Anil Kashyap said that flaws in the regulatory system led to arrangements in which a small shock in housing could roil broader financial markets.


This event is part of the Initiative on Global Markets and is generously sponsored by Myron Scholes.