Summary
This video discusses financial market failure, which happens when markets do not allocate financial products efficiently, leading to a misallocation of resources and systemic risk. Excessive risk-taking can result in financial collapse and a breakdown of the financial system. Factors like collusion among banks, deregulation in the 1980s, and manipulation of interest rates can contribute to market failures, negatively impacting the economy.
Financial Market Failure
Occurs when freely functioning financial markets fail to allocate financial products at the socially optimum level, resulting in a misallocation of resources.
Excessive Risk and Systemic Risk
Excessive risk leads to systemic risk, causing financial collapse and a breakdown of the financial system due to the creation and trading of risky assets.
Consequences of Excessive Risk
Excessive risk can result in the collapse of the financial system, loss of confidence in the banking industry, and negative impacts on the economy such as job loss and output reduction.
Collusive Agents and Market Failure
Market failure occurs when collusive agents, such as banks, conspire to manipulate interest rates or exchange rates, leading to monopoly pricing and market distortions that harm society.
Impact of Deregulation on Financial Market Failure
The deregulation in the 1980s, known as The Big Bang, shifted focus towards the financial industry, increased systemic risk, and allowed for risky practices such as investment banking without stringent regulations, leading to heightened financial market failure.
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