It began when increased perceptions of risk resulted

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Unformatted text preview: but this did not prevent a net increase in the overall liabilities of financial intermediaries, intermediaries, and hence in credit supply. The The financial crisis that began in summer 2007 also originated in a change in the supply of intermediation. It began when increased perceptions of risk resulted in increases in the margin requirements demanded by creditors in short-term lending collateralized by mortgage-backed securities, creating a liquidity crisis for issuers of asset-backed commercial paper. The effect of deleveraging in this sector on the market value of mortgage-backed securities further impaired the capital of financial intermediaries more broadly, requiring further deleveraging, in a vicious spiral: spiral: again, Brunnermeier (2009) describes this process in detail in this journal. In In terms of the model, the net result of both reductions in the acceptable degree of leverage and impairment of the capital of the financial sector was a sharp leftward shift of the supply of intermediation XS. As illustrated by Figure 4, the result was a As simultaneous contraction of the volume of...
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This note was uploaded on 11/23/2013 for the course ECON 11837649 taught by Professor Batchelder during the Spring '10 term at Pepperdine.

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