THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 233
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CHAPTER 9
STAGE ONE
Initiation
of Financial
Crisis
Deterioration in
Financial Institutions
Balance Sheets
Financial Crises and the Subprime Meltdown 201
Asset Price
Decline
Increase in
Interest Rates
Increase in
Uncertainty
Adverse Selection and Moral
Hazard Problems Worsen
STAGE TWO
Banking
Crisis
Economic Activity
Declines
Banking
Crisis
Adverse Selection and Moral
Hazard Problems Worsen
Economic Activity
Declines
STAGE THREE
Debt
Deflation
Unanticipated Decline
in Price Level
Adverse Selection and Moral
Hazard Problems Worsen
Economic Activity
Declines
Factors Causing Financial Crises
Consequences of Changes in Factors
FIGURE 9-1
Sequence of Events in Canadian Financial Crises
The solid arrows in Stages One and Two trace the sequence of events in a typical financial crisis; the dotted arrows show
the additional set of events that occur if the crisis develops into a debt deflation, Stage Three in our discussion.
