Briefly describe the Global Financial Crises in 2008 and discuss in what ways asymmetry information played a role in the crises.

 

In any situation involving a borrower and a lender, asymmetric information may occur when the borrower fails to reveal negative information about his or her actual financial condition. Or a worst-case scenario such as a work loss or an unanticipated cost could actually not be planned by the borrower.. A fine example of how asymmetric knowledge can distort a market and trigger market collapse was the 2007-2008 subprime loan crisis. Securities backed by mortgages were the goods behind the crisis. The mortgages were lent to buyers by banks and later sold to third parties. Those third parties bundled them in lots together and sold them on to buyers. The securities were listed as high-quality and marketed as such. But most of those including most of the individual mortgages used in those items were extended beyond their means to borrowers who bought bubble-priced properties. The borrowers were trapped as rates stalled, as were the secondary buyers of their mortgages. The sellers had knowledge that the end purchasers did not unless nobody did their homework at any point of this complicated process. That is, they realized they were passing off risky mortgages as high-quality debt. They benefited from asymmetric information.

Global financial markets had started to display signs by the summer of 2007 that the bill was due for a years-long binge on cheap credit. BNP Paribas warned investors that they would not be able to withdraw capital from two of its funds, and the British bank Northern Rock would soon be seeking emergency financing from the Bank of England, since two Bear Stearns hedge funds had failed. Despite the warning signs, however few investors feared that the worst crisis in almost eight decades was about to engulf the global financial system, bring the giants of Wall Street to their knees and cause the Great Recession. It was an unprecedented financial and economic crisis that cost the employment and retirement plans of many ordinary citizens.