Question

Government policies and practices, were they partly at fault for causing the Great Recession of 2008?

Please elaborate

Answer 1

The main cause of great recession in 2008 is liquidity crisis it means banks donot have enough liquidity to meet repayment requirement.

Besides these in the previous years US real estate price have shown stable growth rate but in this particular time real estate pricefall almost 200%. So the investors fail to repay their loans to bank and total monetary system fall down.

And another reason could be many financial institutions accept amny fraud mortgage or it can be said that they have invested in more risky assets without calculating the risk.

Fiscal policy:

Many Govt as well as US took expansonary fiscal policy by rebate in tax and expanding expanditure (Based on Keynsian Model). UsS govt gave $600 billion tax rebate to middle and low income americans.

Monetary Policy:

US fed has introduced new regulation of banks called BASEL 3. They have also introduced a new concept too big to fail banks.

In Basel 3 they reintroduced some ratios like reserve requirement ratio, capital adiquacy ratio etc. And in too big to fail banks, they identify those bank which may affect economy after defaulting.