Question

1. Causes of the 2007-2009 financial crisis and recession.  Include:
   1. Relatively severity of the recession.
   2. Major causes discussed in the class notes, videos, and text.
   3. Actions the FED, congress, and president took to mitigate the crisis.
   4. “Take” on the crisis by the “Inside Job” video or alternative video on the crisis.

Answer 1

The financial crisis of 2007 is the breakdown of confidence that took place between banks the year before the financial crisis of 2008. It was triggered by the crisis of subprime mortgage, triggered by the unregulated use of derivatives themselves. This timeline involves signs, triggers, and breakdown signs of early warning. It also shows the steps the U.S. has taken. To avoid an economic collapse, the Treasury and the Federal Reserve. The financial crisis, despite these attempts, still resulted to the Great Recession.

The housing slump set off a chain reaction in our economy. Individuals and investors could no longer flip their homes for a quick profit, adjustable rates mortgages adjusted skyward and mortgages no longer became affordable for many homeowners, and thousands of mortgages defaulted, leaving investors and financial institutions holding the bag.

This caused massive losses in mortgage backed securities and many banks and investment firms began bleeding money. This also caused a glut of homes on the market which depressed housing prices and slowed the growth of new home building, putting thousands of home builders and laborers out of business. Depressed housing prices caused further complications as it made many homes worth much less than the mortgage value and some owners chose to simply walk away instead of pay their mortgage.

The most important action was the creation in October 2008 of the Troubled Asset Relief Program (TARP), which quickly helped to recapitalize the financial sector and prevented what could have been the complete disappearance of financial intermediation for many years.

The Federal Reserve’s response to the crisis evolved over time and took a number of nontraditional avenues. Initially, the Fed employed “traditional” policy actions by reducing the federal funds rate from 5.25 percent in September 2007 to a range of 0-0.25 percent in December 2008, with much of the reduction occurring in January to March 2008 and in September to December 2008. The sharp reduction in those periods reflected a marked downgrade in the economic outlook and the increased downside risks to both output and inflation. In addition to its forward guidance, the Fed pursued two other types of “nontraditional” policy actions during the Great Recession. One set of nontraditional policies can be characterized as credit easing programs that sought to facilitate credit flows and reduce the cost of credit