Response fed was created o not very well designed

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Response- Fed was created o Not very well designed- arrangements of banking system disappeared but Fed didn’t do well which led to crisis o Response- Federal deposit insurance- added another layer of intervention that didn’t solve the fragmentation problem o Adaptation- banks, overtime, increasingly cut their capital- higher leverage, more profitable SNL crisis- o Moral hazard from deposit insurance catches up o Rather than erasing two previous problems they add a new adaptation, Capital requirements o Adaptation of capital requirements led to the financial crisis Proximal causes: o The adaptation to capital requirements- Fannie and Freddie Accelerated banks moving out to other markets to avoid regulation (commercial lending, finance companies, commercial paper) Mortgage lending was affected a lot The first change- Fannie and Freddie (put together mortgage backed securities and marketed them)- could buy at treasury rates and invest in mortgages and they had low capital ratios. Took over mortgage market in 90s o The Shadow banking System (gov. securities dealers becoming borrowers against repo- bank
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  • Fall '19
  • Finance, Fractional-reserve banking, Subprime mortgage crisis

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