Policy Documents

Balance Sheet Crises: Causes, Consequences, and Responses

Steven Gjerstad and Vernon L. Smith –
September 6, 2013

In this essay in the CATO Journal, the authors argue that the balance sheet crises, in which the prices of widely held and highly leveraged assets collapse, pose distinctive economic challenges. An understanding of their causes and consequences is only recently developing, and there is no agreement at all on effective policy responses. A preliminary purpose of this article is to examine in detail the events that led to and resulted from the recent U.S. housing bubble and collapse, as a case study in the formation and propagation of balance sheet crises. The primary objective of the article is to evaluate similar events around the world with a view toward assessing the economic performance of countries that have pursued varied alternative policies.