Question

What major theoretical issues in monetary macroeconomics emerged into public debate in connection with the 2007-8 financial crisis and the efforts of central banks to mitigate its effects?

Answer 1

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Introduction

The world had experienced drastically the impact of 2007-8 financial crisis and its affects on economy.

The financial crisis of 2007–08, also known as the global financial crisis, was a severe worldwide economic crisis. It is considered by many economists to have been the most serious financial crisis since the Great Depression of the 1930s.

he crisis began in 2007 with a depreciation in the subprime mortgage market in the United States, and it developed into an international banking crisis with the collapse of the investment bank Lehman Brothers on September 15, 2008

1.subprime mortgage crisis

International trade imbalances and lax lending standards contributing to high levels of developed country household debt and real-estate bubbles that have since burst; U.S. government housing policies; and limited regulation of non-depository financial institutions.

2. Risk-taking behavior

U.S. households and financial institutions became increasingly indebted or overleveraged during the years preceding the crisis. This increased their vulnerability to the collapse of the housing bubble and worsened the ensuing economic downturn.

3.Excessive private debt levels

Excessive consumer housing debt was in turn caused by the mortgage-backed security, credit default swap, and collateralized debt obligation sub-sectors of the finance industry,

4.Home equity extraction

This refers to homeowners borrowing and spending against the value of their homes, typically via a home equity loan or when selling the home.U.S. home mortgage debt relative to GDP increased from an average of 46% during the 1990s to 73% during 2008, reaching $10.5 trillion.[67]

5.Housing speculation

During 2006, 22% of homes purchased (1.65 million units) were for investment purposes, with an additional 14% (1.07 million units) purchased as vacation homes

B) Recession consequences

Recessions result in higher unemployment, lower wages and incomes, and lost opportunities more generally. Education, private capital investments, and economic opportunity are all likely to suffer in the current downturn, and the effects will be long-lived.

Recession-induced job and income losses can have lasting consequences on individuals and families. The increase in poverty that will occur as a result of the recession, for example, will have lasting consequences for kids, and will impose long-lasting costs on the economy.

C) Lesson from recession

1.Risk Matters

Clearly, the amount of risk taken in one's investment portfolio will capture a significantly greater degree of attention in the years ahead

2.Experts Don't Know Everything

We put a lot of trust in experts, including stock analysts, economists, fund managers, CEOs, accounting firms, industry regulators, government and a host of other smart people. They all let us down. A great many of them lied to us, intentionally misleading us in the name of greed and personal profit.

3.You Can't Live on Averages

All of those projections are based on the idea that investors should buy and hold, but 2008 showed that that strategy doesn't always work, particularly for investors who are approaching retirement.

D) Ways to avoid the same repeating mistakes

1.If your investments are doing well and you get a good run, rebalance to remove risk.

2.If the markets have fallen as far as you can stand, take what you have left and get out.

3.You should know your risk tolerance and know how much damage you have the stomach to take.

4.Even if you delegate the investment management to experts, educate yourself so that you understand what your money is buying, what your hired experts are doing and what course of action you will take if things don't go your way

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