ECON 3430 Lecture Notes - Lecture 9: Debt Deflation, Mortgage Broker, Stock Market Crash

• School: York University
• Department: Economics
• Course: ECON 3430
• Professor: Brenda Spotton- Visano

Document Summary

Asymmetric information problems (moral hazard and adverse selection) If financial markets stop functioning, broad economic activity can collapse: dynamics of financial crises in advanced economies. Stage one: initial phase: mismanagement of financial liberalization/innovation. Lenders may not have the expertise, or incentive, to manage risk appropriately in new lines of business; or scale outstrips their ability to screen and monitor: deterioration in financial institution balance sheets. Net worth deteriorates, so financial institutions begin process of deleveraging (cutting back on lending: dynamics of financial crises in advanced economies. Stage one: initial phase continued: asset-price boom and bust. Prices of assets (shares or real estate) grow above their fundamental economic values. Called an asset-price bubble; when it bursts, companies see net worth decline and the incentive to make risky investments grows. With information hard to come by, financial frictions increase, so lending and economic activity decline. Sequence of events in financial crises in advanced economies: dynamics of financial crises in advanced economies.