Financial crisis occurs when asset prices decline and businesses struggle to pay debts. Crisis can be caused by overvalued assets, irrational investor behavior, or systemic failures. Crisis may spread regionally or globally, affecting banks or entire economies
Disequilibrium occurs when market forces prevent reaching equilibrium. Keynes first proposed this theory in 1930s. Market equilibrium requires supply equal to demand at market-clearing price
CDOs were first created in 1987 by Drexel Burnham Lambert. They pool various types of debt into tranches with different risk levels. Senior tranches offer lower risk but lower yields
Housing prices fell for first time in decades in 2006. Banks deregulated financial derivatives, allowing risky lending. Mortgage-backed securities created demand for underlying mortgages. Banks stopped lending to each other due to losses
Financial markets consist of debt, equity, money, and capital markets. Interest rates affect bond prices and are influenced by risk and term structure. Financial markets are generally considered efficient according to the Efficient Market Hypothesis
Crisis occurred between 2007-2010, contributing to 2007-2008 global financial crisis. Housing bubble peaked in 2006, leading to 124% house price increase. Easy credit conditions and high housing prices fueled subprime lending. Mortgage-backed securities offered higher rates than government securities