ECON 3K03 Lecture Notes - Lecture 9: Super Senior, Washington Mutual, Dow Jones Industrial Average
8 Feb 2015
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Document Summary
The economics of money, banking, and financial markets. What is a 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. Asset markets effects on balance sheets: stock market decline. Decreases net worth of corporations: unanticipated decline in the price level. Liabilities increase in real terms and net worth decreases: unanticipated decline in the value of the domestic currency. Increases debt denominated in foreign currencies and decreases net worth: asset write-downs. Factors causing financial crises: deterioration in financial institutions" balance sheets. Loss of information production and disintermediation: increases in uncertainty. Factors causing financial crises (cont"d: increases in interest rates. Increases need for external funds and therefore adverse selection and moral hazard: government fiscal imbalances. Create fears of default on government debt. Investors might pull their money out of the country. Economies: stage one: initiation of financial crisis.
