Question

Economics Question:

Discuss the stages of a financial crisis (define each stages), in doing so, discuss the causes of our 2007-2009 financial crisis and impacts on our economy. Include a discussion of the main remedies our government and central bank pursued to deal with the crisis.

Answer 1

Five distinctive stages of the ongoing global financial crisis: the collapse of the subprime mortgage market; the spillover into the wider credit market; the liquidity crisis epitomized by Northern Rock, Bear Stearns and Lehman Brothers with counterparty risk effects on other financial institutions; the commodity price bubble and the ultimate demise of investment banking in the United States.

Built on credit is the American economy. If used wisely, credit is a great tool. For example, it is possible to use credit to start or expand a business that can create jobs. It can also be used to buy large items like houses or cars. Once, more jobs are being created and the needs of people are being met. Yet credit has gone unchecked in our country over the past decade, and it has gone out of reach. Hypothecary brokers, acting only as middle men, determined who received loans, then passed on responsibility for those loans to others in the form of mortgage-backed assets (after paying the loan for themselves). Exotic and risky mortgages became commonplace and by packaging these bad mortgages with other mortgages and reselling them as "investments," the brokers who approved these loans relieved themselves of responsibility.

Thousands of people took out loans that were bigger than they could afford in hopes of either selling the house for profit or refinancing later at a lower rate and with more equity in their home–which they would then use to purchase another "investment" property. Quickly a lot of people got rich and people were looking for more. What you needed to buy a house before long was a heartbeat and your promise you can afford the mortgage. There was no excuse for brokers not to sell you a home. They cut the sale, then packed the mortgage with a group of other mortgages and wiped out all the loan's personal responsibility. But many of the assets backed by these mortgages were ticking time bombs.

The housing slump in our economy has caused a chain reaction. Individuals and buyers were no longer able to flip their homes for a quick profit, adjustable mortgage rates were set to skyward, and loans were no longer affordable to many homeowners, and thousands of mortgages collapsed, leaving lenders and financial institutions to hold the bag. This caused massive losses in securities backed by mortgages and many banks and investment firms started bleeding money. This also caused a glut of houses on the market that depressed housing prices and slowed the growth of new home building, putting out of business thousands of home builders and workers. Depressed housing prices created more problems as many homes were worth much less than the mortgage value, and some owners decided to simply walk away rather than pay their mortgage.

The act called the 2009 American Recovery and Reinvestment Act (ARRA) is one of the key components of the economic recovery in the United States. This spends money to boost consumption and growth in the economy.
ARRA is based largely on the Keynesian macro-environmental concept of driving spending by enabling spending, in turn driving demand, creating jobs, and further driving spending. One rescue plan was the Troubled Asset Relief Program (TARP), which bought toxic assets from banks to stop them from collapsing.
TARP has been criticized for shielding banks that have acted unethically and lacked strategic knowledge as corporations, meaning that they ought to have collapsed.
While the stock market has stabilized and the banks are now in better shape than they were before the crash, the average American is still less likely to be employed or underemployed.