Notes

The Financial crisis that started in 2008 led to one of the highest percentages reported in the U.S. since the Great Depression of unemployment and house foreclosures. Directly caused by the downturn in securities backed by subprime mortgages, the crisis extended to investment funds, savings, and the companies that hold those securities with broad national and international effects.

According to common wisdom, the housing sector crashed because subprime mortgage lenders had financial opportunities to pack and pass on toxic mortgage-backed securities to other lenders to enjoy high origination fees. The failure of the mortgage market shook the US and the world economy (Coghlan, Mccorkell, & Hinkley, 2018).

The collapse in housing prices destroyed the financial market system’s assets and thus created conditions under which a run on the financial system could take place. These drop-in assets weakened the entire banking system, hampering its ability to moderate not only house transactions but more broadly investment (Christiano, 2017).


The administration had specifically pushed up the bubble by maintaining interest rates too close to zero and propping up housing. In specific, large parts of the housing sector, such as subprime mortgages, were underwritten by Fannie Mae and Freddie Mac-government-created and subsidized institutions (Samuelson, 2011).

There is a universal consensus that administrative overlook, particularly in the mid-2000, helped laid the groundwork for the great recession — and that some lethargy of the financial institutions was clear only after the fact, much of it was clear in advance. There is so much blame going around the administrative world that it’s good (for the Fed) to share responsibility among six different agencies (in the U.S.). There was no need for the Federal and other bank officials to go to Congress for any extra jurisdiction to clamp down on the obviously hazardous and flawed mortgage lending or on the unfair and even fraudulent lending terms that were clear all around. Their non-existing authority was enough; they had not been using it. And the poor went to even worse under malign neglect. All of USA’s bank officials, including Federal, earned a failing grade for this underwhelming performance. (Taylor, 2014)

The whole point of having a central bank is to fine-tune the supply of money to a national economy’s true needs — to buy goods and services, to finance wealth creation — to achieve optimum viable long-term growth. Since monetary policy is a crucial factor, central bankers are attempting to subtlety the sum of money and credit in the scheme; if it holds interest rates too low for too long, it is causing an unjustified credit expansion. As the supply of money rises relative to genuine economic production, the leakage of excess buying power leads to increased prices of goods and services (WSJ, 2009).