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Financial Crises

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Financial Crises

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  1. Financial Crises Mankiw (p. 245)

  2. 6 Stages • 1. Large decline in some asset prices • Great Depression (Black Sunday – Stock market) • 2008-2009 (real estate) • 2. Insolvencies in Financial Institutions • Loans not repaid • 3. Decline in confidence in Fin. Inst. • Withdrawls for uninsured deposits • “Fire sale” on loans/assets to increase reserves

  3. 6 Stages • 4. Credit Crunch • More reserves to cover withdrawls • Decreases multiplier -> decreases M1/M2 • Decrease in lending • Decrease in investment -> no expansion (labor & capital) • Economic downturn • Decline in profitability/value of assets • Back to step 1