Financial Black-Holes: The Interaction of Financial Regulation and Bailout Guarantees

Aaron Tornell and Rancière, Romain
Authors registered in the RePEc Author Service: Romain Rancière

No 8248, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper argues that the U.S. financial crisis is a new type of crisis: a "financial black hole." Financial black holes are characterized by the breaking-up of credit market discipline and the large-scale financing of negative NPV projects. In a theoretical model, we explain how the combination of perceived government guarantees and the ability to issues catastrophe-bond-like liabilities generate financial black holes. We then show that the stylized facts of the U.S. economy are consistent with a financial black hole equilbrium.

Keywords: Bailout guarantees; Derivatives; Financial crisis; Financial regulation (search for similar items in EconPapers)
JEL-codes: E22 E60 F34 G01 G18 (search for similar items in EconPapers)
Date: 2011-02
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Citations: View citations in EconPapers (3)

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