Ben Bernanke served as chairman of the Federal Reserve during the financial crisis of 2007–2009. In his account of those years, he observed:
Seen from the vantage point of early 2007, the economy’s good performance, combined with the relatively small size of the subprime mortgage market and what appeared to be a healthy banking system led me and others to conclude that subprime problems … were unlikely to cause major damage…. [But the panic in the short-term funding markets that began in August 2007 would ultimately transform a “correction” in the subprime mortgage market into a much greater crisis in the global financial system and global economy.
a. What does Bernanke mean by “the short-term funding markets”?
b. Why was there a panic in the short-term funding markets but not a panic among depositors at commercial banks?
c. Why might the financial crisis have been difficult to foresee, even by people working in high-level positions in the financial system? Were there changes in the financial system that—at least with hindsight—might have indicated that by 2007 a financial crisis had become more likely? Briefly explain.