Question

The financial crisis of 2007–2009 was the most severe one since the Great Depression of the 1930s. What were the main causes of the 2007–2009 financial crisis other than the housing market collapse? What were its impacts on the U.S. financial institutions and markets? If you were an economic policy decision maker, what could you have done better to resolve the financial crisis during that period?

Answer 1

The main reason for 2007-2009 Financial crises are not only housing market collapse but also mortgage loan which were given from bank.

During the period of 2007 Jan to March the house prices are going up and this made the house owners to sell and buy real estate at that time hoping they will earn more income. The Fed lowers the interest rates which made the house owners to take new loans for either buying new house or for personal loan. Due to more investment in housing market the values of securities went down. Many banks invested in these securities started to suffer liquidity crisis. All these consequences made the stock market to fall down which lead the business to incurr losses and unemployment rate goes up. Thus these are the reasons for 2007-2009 crisis.

If I am the policy maker first I will try to stabilize the stock market and financial institutions as these are the two things which make the economy stable. During that period I will use the policy where it will be a mix of contractionary monetary policy and expansionary fiscal policy so that I could create employment along with making people to save more money due to high interest rates. I will help business to invest more and increase the production. I will keep import tariffs to reduce imports and also make policy to increase exports.