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Effects of Financial Panics on Economy - Essay Example

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The statement by Bernanke talks about financial crisis in the market and the prospective causes (Bernanke 1). The statement prospects that the financial crisis resulted from significant losses from residential mortgage loans given to subprime borrowers. The potential for losses are large especially with outstanding funds in the subprime mortgages (Bernanke 2). However, apart from mortgage loans, lack of government’s crisis-response plans can result to severe financial crises, which adversely affect the broader economy. When banks run short of funds, depositors in the bank, and lenders in the commercial market, place the highest value on safety and liquidity (Bernanke, 2). According to Gary Gorton, when banks find funding costly and difficult, investors pull back funding and affect the country’s economy. For example, a medium-sized German bank announced to receive extraordinary support from the government and German banks association to meet its obligations. This resulted from inability of its Rhineland off-balance sheet to roll over the asset-backed commercial paper it issued in U.S market to fund its asset-backed securities (Bernanke 2). Commercial paper investors became concerned about the bank’s ability to meet its obligation and withdrew their investments. The financial panics the investors experience makes them withdraw their investments from the bank, affecting the economy. Shortfalls in the private sector amplify effects of financial panics on the economy. Bernanke’s

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article concludes that they amplified the causes of the crisis, posing threat to financial and economic stability (Bernanke, 12). Lack of timely and effective government action affects the possibility to contain the severity of financial disruptions and their economic effects (Bernanke 18). The government’s panic of losing finances of the too-big-to-fail firms calls for its support to prevent the firm from going into liquidation. This is because its liquidation largely affects the entire economy (Bernanke 20). Christina’s article talks of Depression in the United States. The main topics include the causes, the start, the worsening, and the end of the Depression. The topics are of importance because they help to study the market Depression in America effectively.

Summary

The following essay gives a detailed information about how economics can change due to financial panics which can result from an expected financial crisis that markets foresee in the future depending on monetary policies existing in the market before a crisis appears…
Effects of Financial Panics on Economy
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