The 2007 to 2008 Financial Crisis History Research (Essay Sample)

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The 2007 to 2008 Financial Crisis
Introduction
The financial crisis of the period between 2007 and 2008 is considered the most severe economic downturn in America since the Great Depression during the 1930s. This financial crisis spread all over the world and caused a lot of damage to the economies of other nations. The effect on other states was because the United States was the leading economic power at that time. The US housing market was considered to be the primary cause of the financial crisis. House prices were going down rapidly due to the persistently low-interest rates, over fair lending and great speculation. As a result, many people were buying the same thing, houses, leading to inflation and increased demand. Speculation on oil prices and higher unemployment also increased inflation, thus contributing to the financial crisis (Fried, 20).
There was considerable market instability in the US. There was a change in the ability to create new lines of credit that consequently, reduced the movement of cash, and there was a different economic growth where people were buying and selling assets. As a result, financial institutions faced a challenge because most of them were holding mortgages. The mortgages had reduced substantially in value and were not covering up for the money needed to pay the loans. Due to this, the financial institutions were not able to give more loans hence draining their cash reserves thereby the great financial crisis (Fried, 23).
Some of the effects of the 2007 to 2008 financial calamity were; there was evaporation of liquidity. Investors liquidated assets deposited in highly esteemed financial institutions. There were also bad debts not paid back. Besides, many countries were relying on the economy of the United States of America. Developing countries that were coming up strongly regarding economy were forced to reduce their rate of development. A country like Kenya saw its development rate drop from 7% to 3%. Another effect of the financial crisis was that the unemployment rate of US increased to 10%. This rise in unemployment ever experienced in America (Krugman, 53).
Federal Reserve
Federal Reserve referred to the principal bank of the US and it came into existence on 23rd December 1913 mainly to respond to the financial panics. Some of the duties of the Federal Reserve are to regulate and supervise banking institutions, maintain the stability of financial systems, provide financial services to the US government, carrying out research into the budget and releasing frequent publications about the US economy (Abigail, 18).
The 2007-2008 financial crises were the worst financial crisis ever witnessed in the United States of America. The Federal Reserve struggled to prevent the American financial system from collapsing and also to avoid another depression like the one experienced in the 1930s. The Federal Reserve System carried out the following activities to help minimize the effects of the monetary crisis of 2007 to 2008;
First, the government took control of the American International Group (AIG). AIG was one of the largest insurance companies worldwide. Due to the financial constraints experienced by this group, private lenders refused to loan money to it hence prompting the federal government to take control of it and guaranteed it a loan of $85 billion. These actions by the government were meant to help the company to be able to stand on its feet again (Ehrbar, 82).
Secondly, the government through the Federal System took a 79.9% equity position in American International Group. The assets of AIG served as collateral. These included their insurance revenues. The loan forced AIG to sell its several businesses that did not bring in any profit. As a result, there was a boost in the company’s cash position, and it also divested its non-performing debts.
Thirdly, the government was controlling a private firm for the first time. The Federal Reserve applied a provision of the acts of the Federal Reserve. This act authorizes that the Federal Reserve can give loans to companies that are not banks in situations of emergency or unusual situations. As a result, the president of AIG was forced to leave the business so that the government can take charge and rescue the collapsing insurance firm that was contributing to the financial crisis in the United States of America in 2007 to 2008 (Ehrbar, 83).
Fourth, the Federal Reserve finalized new rules that were to apply to mortgage lenders to avoid the occurrence of another financial crisis shortly. The rules were to prohibit banks from making high-priced loans without considering the consumers’ ability to make payments. It also required lenders to verify the income and assets that they were to rely on when making decisions on credit.
Fifth, the Federal Reserve expanded money supplies. The extended amount was to enable the central bank to retain its role as the lender of the last resort. It was also to increase the flexibility and ease with which institutions could make use of this liquidity. The Federal Reserve also purchased $2.5 trillion of the government debt and private assets from banks. The investment made a history as the largest liquidity injection into the credit market and the most significant monetary policy action.
The three top economic goals of the United States are economic growth, low unemployment, and low inflation. The US government and the Federal Reserve were responsible for formulating these three primary economic goals. The three goals influence the standards of living of the Americans and are therefore crucial (Mansell & When, 38). The three major economic objectives of the United States are explained as follows;
The first economic goal is low unemployment. Unemployment was on the rise during the financial predicament of 2007-2008. Some of the measures that the government took to ensure there was low unemployment after the financial crisis include; investment in infrastructure, reduction of cost of health care, reduction of cost of hiring employees, and increasing rates of education and training. When the government invests in infrastructure, employment opportunities are created for millions of people with different educational backgrounds. Employers are required to pay for health care for their employees. Since the cost was high, companies cut down the number of workers thus limiting the employment chances for many people. However, with the reduction in the cost of health care, most institutions are hiring more workers thus increasing the rate of employment.
The second economic goal in the States is low inflation rates. Inflation refers to the reduction of monetary value and a rise in the cost of goods and facilities. The government of the States and the Federal Reserve ensures that the rate of inflation is low to avoid another financial crisis. Low inflation is beneficial to the economy of United States since it encourages the Americans to buy more goods and services. It also makes it easier and attractive to borrow money from financial institutions because the interests are low when inflation rates are low.
The third economic goal of the United States is economic growth. The Federal Reserve maintains stable prices thus maximizing economic growth. The Federal Reserve can implement the monetary policy to ensure that the American economy utilizes all the available resources to safeguard the economic growth by reducing the chances of a financial crisis. The resources in this instance include the workforce. Through the low unemployment levels, it is, therefore, possible for the National Reserve to ensure the economic growth of USA. It is also possible to plan for future economic growth due to low inflation put in place by the Reserve. The Federal Backup has therefore set an inflation target of 2% for the purpose of economic growth.
Monetary and Fiscal Policies
Monetary rule refers to the process whereby the monetary authority controls the supply of money. It also targets inflation rates and interest rates to ensure that there are price stability and trust in the currency. In the United States of America, the monetary authority is the Federal Stand-in. The National Reserve implements the monetary policy by manipulating the rates of short-term interests (Woodford, 88).
Fiscal policy is the usage of government revenue and expenditure to control the economy. A monetary policy can also be the changes that the government makes in the national budget to affect a country’s economy.
The outbreak of the financial crisis in 2007 to 2008 led to several policy responses by fiscal and monetary policies by the US government and the Federal Reserve. Economic policies applied by the US government were;
President George W. Bush signed the Economic Stimulus Act of 2008 whereby a $152 billion stimulus was to help ease the recession. The bill constituted $600 tax rebates allocated to low and middle-income earning Americans. The United States also combined stimulus actions into the American Recovery and Reinvestment Act of 2009. It was a $787 billion bill that covered expenses from rebates on taxes to business investment. $184.9 billion was for use in 2009 and $399.4 billion was for use in 2010. The remainder of the bill’s estimations spread to the entire decade (Broda, 33).
The monetary policies adopted after the 2007-2008 crises were; forward policy guidance and large-scale asset purchase. The forward policy guidance was important because it shifted the market expectations concerning the future path of the rates of the federal funds. The shift in the market expectations led to the reduction of yields on Treasury securities between one and two-tenths percent. This reduction was a big fall in interest rates. They use the forward policy guidance has become the principal monetary policy tool. The Federal Open Ma...