Us Subprime Mortgage Crisis Essay

Decent Essays
The Global Economic Environment
EMBA 683 - Fall 2011
Case: U.S. Subprime Mortgage Crisis - Policy Reactions

1) What are the causes behind the U.S. Subprime mortgage crisis? Is one cause more responsible than another?
The first and more important factor that lead to the subprime mortgage crisis was governments creation of Freddie and Fannie. This move by the government to intercede the private financial industry sector eventually lead to the US government being the largest lender of mortgages in the US. In addition to the flawed notion that government should determine who and how a borrow qualifies for mortgage loan is disconcerting in and of itself, but this also marked a fundamental change in banks models of originate and hold
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All of the innovated financial instruments mentioned above allowed individuals that would have never been able to qualify for a mortgage in the past to enter the market. This surge of new home buyers into the market created a spiraling effect that now leaves are market in an excess supply of homes, and a failed mortgage system that was created and still subsidized by the tax payers as we continue to bailout Freddie and Fannie.
2) What has the Fed done with regard to monetary policy to address the economic downturn resulting from the subprime crisis? What is your assessment of how Ben Bernake has handled the situation?
The Fed implemented several strategies in an attempt to stabilize the economy by first targeting the struggling Financial Industry. The first move by Bernake was to reduce the target funds rate to 0-0.25% in an attempt to provide liquidity to the banks that needed it. Benake also increased government spending by building up their balance sheet with the assets that were currently frozen in the capital markets, such as mortgage backed securities. The Fed believed that by purchasing these assets from the banks it will remove the assets from the banks but also recreate a market for these type of financial instruments, which would ultimately help the housing industry as well. To help illustrate Benake's monetary policy philosophy and actions are best summarized by the following quote, "people know that inflation erodes the real
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