Question

Economics 3010 - Global Money Markets and Financial Systems

In at least 500 words, Discuss the stages of a financial crisis. In doing so, discuss the causes of the 2007 to 2009 financial crisis in the impacts on our economy. Include a discussion of the main remedies our government and the central bank have pursued to deal with the crisis.

Answer 1

The financial crisis was triggered largely by financial-sector deregulation. Which allowed banks to participate in hedge fund derivatives trading. Banks then requested more mortgages to back these derivatives ' profitable sales. They generated interest-only loans which became affordable to borrowers who were subprime. Throughout 2004, just as the interest rates on these new mortgages reset, the Federal Reserve increased the fed funds limit. Housing prices started to decline in 2007, when demand outstripped supply. That stuck homeowners who had not been able to afford the payments but could not sell their property. As the derivatives ' prices crumbled, banks halted each other's lending. Which produced the financial crisis which caused the Great Recession.

Since the threat to economic stability in the current episode was so closely related to financial sector problems, most of the policy responses concentrated on financial institutions and markets and credit flows to households and businesses. Most of these measures were aimed at counteracting the tightening of financial conditions that emerged as borrowers became more risk-averse and took steps to preserve capital and liquidity. To this end, the Federal Reserve has lowered interest rates, made available to private borrowers alternative sources of liquidity, and used its own lending power to seek to stimulate a variety of financial markets.

In addition, a number of steps have been taken by the Federal Reserve, the Treasury and the Federal Deposit Insurance Corporation (FDIC) to stabilize and repair financial institutions in order to reduce the propensity of those institutions to withdraw from lending and thus exacerbate the decline in spending. Many government policies work at the crossroads of the physical and financial sectors. For example, mortgage reduction not only helps to keep people in their houses, but can also reduce downward pressure on house prices and keep loan losses at borrowers low.