Market Failure in the Financial Sector

Question 1

What are the 5 types of financial market failure?

Answer 1

asymmetric information
speculation and market bubbles
negative externalities
moral hazard
market rigging

Question 1

Asymmetric information

Answer 1

bankers knew more about adjustable interest rates and subprime mortgages
bankers also knew more than regulators

Question 2

Speculation and market bubbles

Answer 2

bankers speculated house prices would continue to rise - gave out more sp mortgages
^^ increased demand for houses, increased prices = housing bubble
- bubbles burst

Question 3

Negative externalities

Answer 3

banks couldn’t lend money
firms had to let workers go
less consumption, less AD, decrease real GDP
taxpayers had to bail out banks via government

Question 4

Moral hazard

Answer 4

banks didn’t feel consequences as they were bailed out by banks
lead to more market failure in future

Question 5

Market rigging

Answer 5

where firms unfairly try to control prices which distorts the price mechanism . e.g LIBOR and Barclays