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Breaking the ice: government interventions in frozen markets

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  • Benjamin Lester

Abstract

When subprime mortgage defaults started mounting in 2007, financial institutions found themselves unable to profitably sell off these soured investments or raise new equity. As these institutions struggled to reduce their leverage, consumers and firms alike found it increasingly difficult to borrow, which helped trigger a deep recession. Within the context of two popular explanations for the freeze ? asymmetric information and debt overhang ? Benjamin Lester discusses the costs and benefits of policies aimed at thawing markets in a crisis, including direct asset purchases, equity injections, and public-private risk-sharing programs.

Suggested Citation

  • Benjamin Lester, 2013. "Breaking the ice: government interventions in frozen markets," Business Review, Federal Reserve Bank of Philadelphia, issue Q4, pages 19-25.
    • Handle: RePEc:fip:fedpbr:00003
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    References listed on IDEAS

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    1. Camargo, Braz & Lester, Benjamin, 2014. "Trading dynamics in decentralized markets with adverse selection," Journal of Economic Theory, Elsevier, vol. 153(C), pages 534-568.
    2. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
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    Cited by:

    1. Daniel R. Sanches, 2014. "Shadow banking and the crisis of 2007-08," Business Review, Federal Reserve Bank of Philadelphia, issue Q2, pages 7-14.
    2. Braz Camargo & Kyungmin Kim & Benjamin Lester, 2016. "Information Spillovers, Gains from Trade, and Interventions in Frozen Markets," The Review of Financial Studies, Society for Financial Studies, vol. 29(5), pages 1291-1329.

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