EC223 Chapter 9: Chapter 9 Notes
Document Summary
Chapter 9: financial crises and the subprime meltdown. Bank panic when multiple banks fail simultaneously. Financial liberalization the elimination of restrictions on financial markets and institutions, or when major financial innovations are introduced to the market place, as occurred recently with subprime residential mortgages. Credit boom when restrictions are lifted or new financial products are introduced, financial institutions frequently go on a lending spree. Deleveraging with less capital, financial institutions cut back on their lending. Asset-price bubble when asset prices in the stock market and real estate are driven well above their fundamental economic values by investor psychology. Debt deflation a substantial unanticipated decline in the price level sets in, leading to further deterioration in firms" net worth because of the increased burden of indebtedness. Subprime mortgages mortgages for borrowers with higher expected default rates than prime, but with better credit records than subprime borrowers.
