Large losses taken by financial institutions and investors, mostly from mortgage-related assets, have increased uncertainty and undermined confidence; these events have caused lenders to greatly tighten credit conditions for households and businesses, which, in turn, have contributed to a downturn in the economy that has reinforced the strains in the financial system.
1 One consequence of the distress in financial markets is that banks are being pushed to take a greater role in financial intermediation, which reverses, in part, a long-term trend away from bank-based financial intermediation and toward market-based intermediation. And, indeed, bank lending surged earlier in the fall following a lull over the summer.