ECON 305 Lecture Notes - Lecture 9: Eurodollar, Bear Stearns, Stock Market Crash
8 Oct 2018
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Document Summary
Econ 305 chapter 9 financial crisis: a financial crisis occurs when there is a large disruption to information flows in financial markets, the result is that financial frictions increase sharply and financial markets stop functioning. Asymmetric information problems (moral hazard and adverse selection) If financial markets stop functioning, broad economic activity can collapse. Stage two: banking crisis: deteriorating balance sheets lead some financial institutions into insolvency (negative net worth) In a panic, depositors fear for the safety of their deposits and withdraw them. Can lead to a fun on banks, which forces banks to sell off their assets to raise the necessary funds. May spark a fire sale of assets: eventually, insolvent firms are liquidated and recovery begins as uncertainty falls and balance sheets improve. Stage three: debt deflation: if e(cid:272)o(cid:374)o(cid:373)i(cid:272) do(cid:449)(cid:374)tur(cid:374) leads to sharp de(cid:272)li(cid:374)e i(cid:374) the price level, the recovery process can be short-circuited, debt deflation: Debt is typically fixed in nominal terms, as are payments.
