Financial Market Failure

Moral Hazard

When a person or organisation takes more risks because they know they are covered by insurance.

For example, Banks in 2008 acted knowing that governments would bail them out if necessary.

Asymmetric Information

When one individual / party has much more information than the other party, and uses that to exploit the other party.

In 2008 Banks sold mortgages that were sub-prime and sold them as "AAA". In 2008 Banks gave out mortgages with fine-print that would cause the interest rate to jump rapidly every year, and knew that the buyers would not be able to pay.

Speculation

A risky action in which a person or organisation tries to predict what will happen to the price of an asset and buys or sells accordingly to make a profit.

• People in 2008 made the assumption that house prices would continue to climb.

"Too big to fail"

When the systemic risk is so large that they would bring other banks down / the whole financial system down. The government has to intervene and bail them out or people would lose their houses and savings.