What role did the following play in the crisis?
a. leverage,
b. securitization and derivatives-mbs, cdos, cds,
c. funding mismatch,
d. shadow banking sector,
e. deregulation,
f. too big to fail/moral hazard,
g. wealth effect
h. animal spirits, deleveraging, fire sales

 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.

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