Financial Crisis Essay
Conclusions of the Financial Crisis Inquiry Commission Dissent Joined by Keith Hennessey, Douglas Holtz-Eakin, and Bill Thomas Dissent by Peter J.This dissertation consists of three essays on financial economics.We find multiple equilibrium responses to a government bailout.Bailout terms that would otherwise be acceptable may be refused due to the stigma.The private signal determines the government's inclination to bailout of a distressed firm because it is used to assess the source of this financial distress.If the private signal increases the government's inclination to bailout, the government may have an incentive to lie and send the opposite message, thereby preserving market discipline.Second, it signifies an increased likelihood of future bailout, which encourages risk taking.
The Commission concluded that this crisis was avoidable.
However, the firm rationally infers this strategic disclosure, and therefore, may assume excessive risk taking no matter what messages does it receive from the government.
Consequently, an informative equilibrium may worsen moral hazard compared to the babbling equilibrium.
Moreover, real estate pricing was severely affected by the crisis.
As a result most people were left unemployed while the lucky ones who retained their jobs experienced drastic fall in income.