Chapter 18
Grasping Origins and Effects of Financial Crises
IN THIS CHAPTER
Understanding that borrowing and debt drive price bubbles and financial crises
Seeing how rising asset prices feed bubbles by increasing the value of loan collateral
Examining how popping bubbles can take down the banking system
Realizing that the post-bubble economy is hamstrung by high debt levels
Identifying why fiscal and monetary policy don’t work very well after a financial crisis
A financial crisis is a period of economic instability triggered by the failure of one or more major financial institutions to fulfill their promises. For instance, banking crises are triggered when banks fail to honor their legal obligation to redeem deposits on demand. And currency crises are triggered when national central banks break promises to maintain fixed exchange rates.
Financial crises can cause recessions, periods of decline in the total output of goods and services produced by the economy. Please understand, though, ...
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