Question

Explain economically what caused the housing crisis and how this crisis led to the 2007-2009 recession. Critically evaluate, using economic concepts, the federal government’s response to the recession. What changes in policy would you recommend for the future? Explain your recommendations using economic concepts

Answer 1

The housing crisis in US during 2007 leads to the economic recession in 20008. Federal government imposed several policies and programs to support the mortgage loans. These policies improved the social and economic conditions of middle class families. At the same time there are several conservatives questioned this policies of Federal Reserve. Consumers who already have the mortgages were targeted for predatory subprime loans than first time homebuyers. There was a lack of government intervention in consumer protection, private label mortgage securitization which leads this to a crisis. Most of the people used their home wealth for some other purposes like, children’s education, financing for small business etc. The spread of the danger of risky mortgage loans make risk in the entire global system. Federal Reserve started action regarding broad guarantee to the bank accounts, liquidity in the market and the increasing fund level in money market were not sufficient for that condition. This create the condition worsen and do not create any change in the current market situation. These measures create the increasing transparency of the financial market and imposition of risk tools in the economy.
The major recommendation to avoid the crisis are maintaining the stability of the economy through monetary stimulus, fiscal stimulus etc. Provide long term financing for foreign creditors will expand the investment rates. Federal Reserve tried to avoid the creation of panic among the people. Giving the mortgage loans to those needy people will reduce the crisis.