Journal Article

Breaking the ice: government interventions in frozen markets

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.

Keywords: Frozen markets; Equity injections; Debt overhang; Asset purchases;

Bibliographic Information

Provider: Federal Reserve Bank of Philadelphia

Part of Series: Business Review

Publication Date: 2013

Issue: Q4

Pages: 19-25