FINANCIAL CRISIS

STOCK MARKET CRASHES

BURSTING OF FINANCIAL BUBBLES
CURRENCY CRISES
BANKING PANICS

THE GREAT DEPRESSION
excessive speculation
Tighten money supply
Collapse 60% in 10/1929
Agricultural shock: quantity of goodsprice of
goods inflation real price credit activity
BANKruptcy rise due to
agricultural shock
THE GREAT DEPRESSION
- the spread between

that are identical in all
respects except for
quality rating.
2% - 8%
THE GREAT DEPRESSION
EFFECT OF ECONOMIC CONTRACTION:
1. ASYMMETRIC INFORMATION
FIRMS TEND TO AVOID PRODUCTIVE INVESTMENT OPPORTUNITIES
ADVERSE SELECTION
THE PARTIES WHO ARE THE MOST LIKELY TO PRODUCE AN UNDESIRABLE OUTCOME ARE THE ONES MOST LIKELY TO
WANT TO ENGAGE IN THE TRANSACTION

MORAL HAZARD
BORROWERS HAVE OBTAINED A LOAN, THEY MAY TAKE ON BIG RISKS (WHICH HAVE POSSIBLE HIGH RETURNS BUT ALSO
RUN A GREATER RISK OF DEFAULT) BECAUSE THEY ARE PLAYING WITH SOMEONE ELSES MONEY

THE GREAT DEPRESSION
2. DEFLATION OF 25%
-WHEN INFLATION IS BELOW 0%
-CAUSED BY THE INABILITY OF FED TO MEET DEMAND FOR CASH, AGGRAVATED BY THE DECISION OF
DECREASING MONEY SUPPLY.
-INABILITY OF CREDIT TO MOVE FROM SAVERS TO LENDERS.
THE GREAT DEPRESSION
3. UNEMPLOYMENT OF 25%
-DECREASE IN WEALTH (LESS CONSUMPTION)
-DECREASE FIRM PROFITS
-LAYOFF WORKERS
-RISE IN UNETHICAL EMPLOYMENT PRACTICES
THANK YOU!