Economic Crises as a Result of Distrust

A large and relatively unimpeded flow of credit through healthy financial markets is a salient attribute of the U.S. economy and any well functioning modern economy. Banks and other financial institutions channel the economy’s savings toward a variety of current productive uses. By borrowing short-term and lending long-term, these institutions create a flow of credit that passes liquidity from savers to investors, and transforms liquid short-run assets into less liquid long-term assets. But lending in credit markets requires confidence in the borrowers’ ability to repay the debt (principal and interest) in full and on schedule. The current turmoil in U.S. financial markets is the result of a breakdown in that necessary confidence. In an environment of distrust, financial institutions are far less willing and able to lend long-term. This book examines the monetary policy and macro-economic supply factors in U.S. credit markets that contributed to the credit expansion. This book also defines credit default swaps, explains their use by banks for risk management, and discusses the potential for systemic risk. This book consists of public documents which have been located, gathered, combined, reformatted, and enhanced with a subject index, selectively edited and bound to provide easy access.