Macroeconomics For Dummies®, uk edition Published by: John Wiley & Sons, Ltd

Part V


Understanding the Financial Crisis


© John Wiley & Sons


To better understand why the 2008 financial crisis happened, it helps to have a basic understanding of macroeconomics. For a quick rundown of key economic information, check out the Cheat Sheet at

www.dummies.com/cheatsheet/macroeconomicsuk.

In this part …


Banks would like you to think they’re all powerful, but in reality, they’re just as susceptible to financial troubles as firms and individuals. Get the lowdown on the financial system’s weaknesses.


Bankers sometimes try to get away with excessive risk-taking in order to boost their profits, and then the government must decide whether to bail them out if things don’t turn out well. Find out the details on this Catch-22.

Few people were immune to the 2008 financial crisis. Discover what caused the crisis, why economists didn’t predict it and how future crises can be prevented.

Chapter 14


Considering Fundamental Weaknesses of the Financial System


In This Chapter


Understanding that the financial system isn’t perfect


Realising why banks aren’t 100 per cent safe for your money


Seeing how financial institutions rely on each other
The global financial crisis of 2008 was a huge event, which arguably touched the lives of almost everyone on the planet: businesses went bankrupt; assets such as property and shares lost large chunks of their value; people lost their jobs; and policy makers ran around like headless chickens trying to make sense of it all. Mostly, you may remember the real fear and uncertainty that people felt about the future.

If economists are to get their heads around financial crises, they need to understand the underlying weaknesses in the financial system as it stands today. In this chapter we look at two main weaknesses – fractional reserve banking and systemic risk – and analyse the implications of each one.

These two weaknesses aren’t necessarily problems that have to be fixed; instead, they present risks that need to be managed in order to have a well-functioning financial system.