Question

1. Why was it necessary for the government to bail out the banking industry?

2. How do illegal goods affect the price of legal goods?

Answer 1

1. It was necessary for the government to bail out the banking industry to avoid further damages due to the recession. The bailout necessary to reinstall trust of people in the banking industry and the overall financial market as a whole. Had depositors lost confidence in the banking industry, they would have panicked and withdrawn their deposits. This would have created a huge liquidity crisis for banks, which could result in the collapse of the banking system. Depositors' trust in the banking system is an important prerequisite for a well-functioning banking system. The bailout meant that the government was backing the banking system and saved it from a collapse. A collapse of the banking system would have huge and unprecedented repercussion on the entire economy.