Contemporary Issues in Economics Social Sciences Research Paper (Research Paper Sample)

Contemporary Issues in Economics
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Contemporary Issues in Economics
How Central Banks Responded to the Global Financial Crisis, Drawing from the Lessons Learned in the Great Depression
Starting in mid-2007, the worldwide economic downturn crisis rapidly transmuted from the American housing bubble bursting to the most unprecedented recession the globe has experienced in over seven decades. The quality of freshly created mortgages was diminishing considerably. Besides, and perhaps most importantly, the securitization of such mortgages had spread beyond the government-backed enterprises, The Federal Home Loan Mortgage Corporation (Freddie Mac) and The Federal National Mortgage Association (Fannie Mae), which conventionally engaged in the task (Verick & Islam, 2010). Following the ensuing chaos characterized by record borrowing levels by homeowners and continuously escalating home prices, central banks across Europe and America’s Federal Reserve were compelled to act. The Federal Reserve System, which is the United States’ central bank, serves as the principal policymaking institution tasked with combating economic downturns. In August 2007, central banks started supplying colossal amounts of reserves to respond to the stresses witnessed in the interbank loaning market (Verick & Islam, 2010). The lending spread on three-month spread against overnight interbank credits soared. As the problem exacerbated, the range between the government agency securities and the Treasury securities of equal maturity rose simultaneously. The Fed’s policy responses were dropping the fed funds rate and purchasing mortgage and debt backed securities through the Troubled Asset Relief Program enacted by Congress.