Leverage and Asset Bubbles: Averting Armageddon with Chapter 11?

@article{Miller2009LeverageAA,
  title={Leverage and Asset Bubbles: Averting Armageddon with Chapter 11?},
  author={Marcus H. Miller and J. Stiglitz},
  journal={Microeconomics: Search; Learning; Information Costs \& Specific Knowledge; Expectation \& Speculation eJournal},
  year={2009}
}
  • Marcus H. Miller, J. Stiglitz
  • Published 2009
  • Economics
  • Microeconomics: Search; Learning; Information Costs & Specific Knowledge; Expectation & Speculation eJournal
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… Expand
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