Leverage and Asset Bubbles: Averting Armageddon with Chapter 11?

Miller, Marcus H.; Stiglitz, Joseph E.

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Leverage and Asset Bubbles: Averting Armageddon with Chapter 11?

NBER Working Paper No. w15817

29 Pages Posted: 5 Apr 2010 Last revised: 22 Mar 2023

See all articles by Marcus H. Miller

Marcus H. Miller

University of Warwick - Department of Economics; Institute for International Economics; Centre for Economic Policy Research (CEPR)

Joseph E. Stiglitz

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER)

There are 2 versions of this paper

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

Miller, Marcus H. and Stiglitz, Joseph E., Leverage and Asset Bubbles: Averting Armageddon with Chapter 11? (March 2010). NBER Working Paper No. w15817, Available at SSRN: https://ssrn.com/abstract=1583794