Efficient Financial Crises

I analyze the causes of financial crises and policies designed to mitigate their effects. I provide new evidence that the capital structure of financial institutions is significantly more illiquid than that of non-financial businesses. I develop a theory in which such differences in capital structure arise from the differences in information lenders have about the assets of financial and non-financial businesses. I use the theory to show that the illiquid capital structure used by financial institutions leads such institutions to be inherently fragile and that government interventions during a crisis, such as bailouts, are not desirable.