Question

Who/what do you blame for the financial crisis of 2007 - 2008 and the recession that followed? Do you agree with the TARP bailout package? Was it necessary/smart? Share your views after reading about it in chapter 14. Contribute 200 -300 words.

Answer 1

The most important cause of financial crisis is the dispute among the economists. Federal Reserve’s anticipated a mild recession in the beginning of 2001 through reducing the fund rates. This fall in fund rates enable bank to extend consumer credit at low prime rate and encourage lending in subprime or high risk, customers through higher interest rates. This makes advantage over consumer to purchase durable goods like automobiles, appliances and especially houses. This leads a housing bubble. The banks were offer subprime mortgage loans to customers with balloon payments. The home prices continued to increase lead to protect subprime borrowers against high mortgage payments by refinancing this increase the value of homes and selling the homes at profit and also paying off their mortgages. Growth of the subprime lending leads widespread practice of the securitization. Selling subprime mortgages as mortgaged backed securities considered as an important way to increase the liquidity of banks and also reduce the exposure of risky loans.
Trouble Asset Relief Programme (TARP) introduces to purchase the toxic assets and equity from financial markets to strengthen the financial sector. This are the commercial obligations based on mortgages and other instruments which determine the purchase for necessary promotion f financial market and stability. TARP increase the liquidity of the assets by purchasing them using secondary market mechanisms allows the participant institutions to stabilize the balance sheets and avoid further losses. These instruments will try to avoid the boom and also expand the economic growth. The liquidity is managed through this. This will avoid the uncertainty regarding the fund rates in US economy.