The Federal Reserve and the crisis of 2007

The financial system is like plumbing: when it works, we take it for granted. But when it breaks, watch out. If people lose faith in banks and financial markets, they will rush to low-risk alternatives, and intermediation will stop. Savers will not want to lend and borrowers will not be able to borrow. Getting a car loan or a home mortgage becomes impossible, as does selling a bond to maintain or expand a business. When the financial system collapses, economic activity does too.

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