Question

The Great Financial Crisis (GFC) in the United States: Causes and Policy Responses Goal Analyze the recent (2008-2009) episode in the United States – the Great Financial Crisis (or Great Contraction). Your job is to write a 500-word essay that will: (a) discuss the antecedents to the episode – seeds of the crisis that were previously sown. Then, using the IS-LM model, show both (b) the shocks to the economy which occurred and (c) the government policy response. Also, provide a short discussion of the implications for health care business/industry. Background Although it happened some time ago, the Great Financial Crisis (GFC) of 2008-2009 continues to be heavily discussed, including in the popular press. For this assignment, you should read the article “A warning from the almost-depression” by Robert Samuelson, Washington Post, September 16, 2018. For several reasons, this episode is well-suited to the IS-LM model. Your job is to discuss that episode using the model. PLEASE PROVIDE THE REFERENCES THAT YOU USED AND NO Plagiarism (DO NOT COPY FROM OTHER ANSWERS).

The answer should be in the following Format:

our final submission should include the following:

1.      You should have two graphs based on the IS-LM model:

a.       Graph #1: shows the shock(s) that initially took place during the crisis. In other words, how did the IS and/or LM curves move?

                                                              i.      You can approximate these shifts within reason, they do not need to be exact.

b.      Graph #2: shows the effects of the main policy responses by the U.S. government and the Fed.

2.      A discussion/memo that answers the following questions:

a.       What factors led to the GFC? Hint: the Samuelson article provides a good jumping off point.

b.      Why did Graph #1 shift the way it did? Were they big or small shifts?

c.       What are the policies shown in Graph #2 and what were their purposes?

d.      What are the cons of using the IS-LM model to describe the GFC?

Answer 1

The Great Financial Crisis of 2008 was one of the worst economic disasters in the world, after the Great depression, that affected millions of people all over the world. After the 9/11 attack more and more attention was given to terrorism and less to finance which many economists believe to be the main reason for the crisis.

After 2001 the interest rates were vastly reduced as part of the expansionary monetary policy. This reduction in interest rates combined with a rise in housing prices in 2005 peaking in early 2006 led to a housing boom. Now everyone wanted to profit from this housing boom which at that time was promoted heavily by the media as a bubble that will not bust. Banks and financial institutions also turned to housing to increase their profits. Housing banks started issuing more and more loans without doing any background checks on their borrowers. Down payments were reduced from 30% of the house price to 10%. Subprime lending was on an all time high. Banks did not consider the criteria regarding the customer’s financial ability to repay the loan. They were on the assumption that the housing boom is not going to subside so when a borrower is not able to repay their loans they can just take over their houses which they believed would lead to more profits. By early 2007 nearly half of the home buyers were taking “no mney down” loans. Many people obtained adjustable rate mortgages (ARMs). Initially low interest rates were offered but they were reset to higher rates making repayment virtually impossible for subprime borrowers. Excessive leverages also turned out to be a big factor. Lehmann Brothers had an all time high leverage ratio of 30:1. It was not just the banks. Common people were leveraging small down payments into big mortgages to buy expensive houses which they could not afford. At the time it sounded like a good idea because they weren’t expecting the house prices to go down so if they couldn’t afford interest payments they could always sell of the house to a profit. But when push came to shove they couldn’t find buyers for houses at the high prices they were hoping for. So prices of homes started to fall and finally in 2007 the housing bubble burst. Borrowers began defaulting and banks were faced with empty houses which they couldn’t clear off. Inter bank transactions started to slow down as nobody wanted to get stuck with the expensive mortgages. One by one banks started failing and the recession hit all sectors severely.

            The US government’s response to the crisis came in the form of a number of expansionary fiscal measures aimed at increasing the output. Monetary policies would not have found much here since it would’ve only led to liquidity trap considering how low the interest rates were. The government had to bailout many financial institutions like Bear Stearns, Fannie Mae, Freddie Mac and AIG. The Emergency Economic Stabilization Act passed in 2008 created the Troubled Asset Relief Program which that used nearly $700 billion to bailout these financial institutions.

The 2008 Economic Crisis did not have as significant an effect on the health care industy though. Although unemployment was at an all time high throughout all sectors health care wasn't affected that badly. According to US Bureau of Labor Statistics employment in health care industry actually continued to grow through the recession. Granted the growth rate was lesser than in previous years, still it was a pretty remarkable feat considering how all the other sectors were doing. Put lightly, be it recession or boom there'll always be a demand for doctors and nurses.