ECO349H5 Chapter 9: Chapter #9 - Financial Crisis
Document Summary
Financial crisis is a major disruption in financial markets characterized by sharp declines in asset prices and firm failure. In aug 2007 subprime mortgages began to default. Recession began in dec 2007 and was the most severe since wwii. Financial friction - asymmetric information problem that is a barrier to efficient allocation of capital. Financial crisis - occurs when information flows in financial markets experience a particularly large disruption with result that frictions increase and eventually economic activity collapses. Financial innovation - seeds of financial crisis often occur when there are new types of loans or financial products. Financial liberalization - another seed of financial crisis where there is elimination of financial markets and institutions. Credit boom - short term spending spree by banks. When there are failures to new companies, there is deposit insurance which is a liability to the government and then the institutions begin to lower lending amounts in a process called deleveraging.
