Answer: The correct answer is : a. Leverage: Crises are more serious when they are accompanied by a credit boom and a very high leverage of market players.
b. securitization and derivatives-mbs, cdos, cds: securitization was the practice of buying mortgages. High risk borrowers with not-so-perfect credit had higher interest rates on their mortgages due to the increased risk of default.
c. . funding mismatch: The banks used securities that were backed by leveraged mortgages and the cash flow did not meet the liabilities.
d. shadow banking sector: Non-bank financial institutions that provide funds but do not have health insurance. Short-term lenders refused to refinance.
e deregulation: Commercial and investment banks assumed large risks due to discrete regulatory changes from 1999 to 2004.
F. too big to fail / moral hazard: The government intervened and saved many companies, because their failure would be a disaster for the general economy.
g. wealth effect: Asset prices increased during the boom years, thus boosting consumption and fueling a drop in the savings rate.
h. animal spirits, deleveraging, fire sales: many institutions needed cash to meet short-term obligations. There was a need to sell assets in the market down.
