Financial Crisis Impact on Us Economy

Topics: Monetary policy, Federal Reserve System, Inflation Pages: 14 (4731 words) Published: April 29, 2012

The Impact of Financial crisis of 2007 on the USA Economy
Mohammed AlAjmi

Fin 410
Prepared for
Dr. Ahmed Khalifa
20th of December 2011
4492 words

Table of Contents
I Financial Crisis and Its Causes 1

II Macroeconomic variables 3

A. GDP 3

B. Unemployment 7

C. Inflation11

D. Exports and Imports13

II. Government efforts to overcome the crisis13

A. Government bailout 13

B. Government stimulus package14

IV. Federal reserve 15

A. Interest rates15

V. Conclusion18

Financial Crisis and Its Causes:
Several debates have been raised concerning the causes of the recent financial crisis. Analysts and policy makers alike have come up with different theorems that seek to explain why the financial crisis occurred and why it had such a broad and long-lasting impact. The US economic sectors are expected to continue experiencing the effects of this crisis for years to come. The crisis has been attributed to various causes including: inefficient credit rating agencies, the 2005 US housing bubble, systemic risk caused by a lax in credit control regulations, government imposed subprime lending, shadow or parallel banking systems, increased mortgage fraud and underwriting, poor securitization, and increased risk taking behaviors by financial institutions. The U.S Federal Reserve offered constructive environment for banks by reduced the lending interest rates in 2008. Large amount of loans were taken by people therefore, increased economy liquidity because of increase in good prices. The money flow in the economy replicated in the whole banking segment, thus reduced the lending interest rates. To start with, the failure of some major sectors, contributed to the financial crisis in US. These sectors include mortgaging industry and shadow banking industries, which were favored by the rules of Federal Reserve of the US. The stability of most productive industry; mortgaging industry, greatly determined the status of the U.S economy. Therefore, any descending minor change in it could cause many disturbances in the economy. The demand for houses became extremely high in the year2008, because of the comfortable lending rules of the Federal Reserve, which encouraged the borrowing of more money by the mortgage firms to at reduced rates. Before long, credit firms started lending mortgages to each potential purchaser. That promoted the demand for houses, and therefore more people rented mortgages, even those with unstable financial base, were still issued the mortgages. So, majority of the mortgage firms were lending with assumption that if a borrower was unsuccessful in making the payment, they could sell their houses to recover the cash. Of course, this was a better idea, but it was ideal to some situations. A crisis occurred when the mortgages were finally adjusted upwards. It became difficult for the borrowers who had been lend the mortgages from firms and those who had borrowed money from the bank for housing purposes to pay (Shiller, 2008). Most of the borrowers were incapable of paying their debts, this lead to losses in mortgage firms, and other institutions, which can give loans such as banks. It became so difficult for the Mortgage firms to resell their clients’ houses since the liquidity positions of all the monetary institutions had been already immensely affected. There were inadequate finances in all economic institutions thus the decline of the economy. Overestimations of prospect house prices was done during the 2007/2008 financial period, where they expected arise in housing price therefore majoring most of the investments in that sector, which eventually flooded leading to excessive supply of materials with a limited demand. This greatly affected the economic status of US, which requires further concentration in order to become...
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