18 the subprime financial crisis of 2007 2008 process

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Unformatted text preview: sive risk.   Credit boom: expanding lending at a rapid pace •  Lack of the exper9se to manage risk appropriately in the new environment •  Increases in moral hazard incen9ve (taking higher risk) for banks with the safety net provided by the government 14 Stage 1: Asset Price Boom and Bust •  Asset price bubble: Asset prices well exceed their fundamental economic values –  Tech stock market bubble of the late 1990s –  Housing price bubble in the late 2000s •  Asset- price bubbles are oqen driven by credit booms. –  Large increase in credit is used to fund purchases of assets, driving up their prices, increasing collateral values, etc… . •  Bubble burst → asset price effect & deteriora9on in financial ins9tu9ons’ B/S 15 Stage 2: Banking Crisis •  Depositors may begin to withdraw their funds from banks (banking crisis or bank panic is likely). •  With the smaller number of banks –  Less informa9on capital –  Worsening adverse selec9on and moral hazard problems •  Sor9ng •  The spiral (worsening prob...
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