ECO 301 Lecture Notes - Lecture 21: Federal Funds Rate, Government Debt, Shadow Banking System

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A financial crisis occurs when there is particularly large disruption to information flows in financial markets resulting in financial frictions increase sharply and financial markets stop functioning. The great depression was the worst economic downturn in us history. It was brought on by: stock market crash, banks panic and rushes, continuing decline in stock prices, debt deflation. Causes: financial innovations in mortgage markets. Subprime mortgages mortgages lent out under subprime conditions and traded like stock among different institutions. Housing bubble created: agency problems in the mortgage market u. Brokers were predatory and encouraged people to take on risky loans because they were offloading the risk to other institutions and did not care about default: asymmetric information and credit rating agencies. Conflict of interest: height of the 2007-2009 financial crisis stock market crash accelerated the week beginning oct. 6, 2008 with the worst weekly decline in u. s. history.

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