The financial crisis of 2008 caused macroeconomists to rethink monetary and fisc

Question

The financial crisis of 2008 caused macroeconomists to rethink monetary and fiscal policies. Economists, financial experts, and government policy makers are victims of what former Fed chairman Alan Greenspan called a “once in a century credit tsunami”—in other words, nobody saw it coming.

Based on the analysis of the data, share your thoughts on what caused the financial crisis and whether the United States is going in the right or wrong direction with its current policies.

Focus specifically on the following:

Monetary policy

What monetary policies do you think caused the crisis?

What were the effects of the policies implemented in reaction to the crisis?

Do you think the solutions worked in the short term? In the long term?

Fiscal policies

What fiscal policies do you think caused the crisis?

What were the effects of the fiscal policies implemented in reaction to the crisis?

Do you think the solutions worked in the short term? In the long term?

Make sure you include the following concepts in your analysis:

Interest rates

The financial services industries (CDOs, CMOs, the stock market, credit flows, money markets, etc.)

Tax rebates

Stimulus

TARP

Government debt and deficit

Inflation

Unemployment

GDP

In your opinion, did government intervention help or harm the economy before and after the panic of 2008? Would you have done anything differently?

Explanation / Answer

The financial crises of 2008 caused macroeconomists to rethink monetary and fiscal policies. The financial crises happened because banks were able to create too much money, too quickly, and used it to push prices of houses and speculate on financial market.

Each time a bank makes a loan, new money is created in the economy. Banks created huge sums of new money by making loans. The amount of debt and money has been doubled in just 6 years.

To correct this crisis, the central bank reduced the interest rate 7 times and reduced to a lowest of 2%. This was done just to boost the liquidity in the economy. Through various ways the central bank tries to regulate the economy like one agency in charge of business conduct and consumer protection. It established a mortgage origination commission.

But the main issues are keeping good regulators is difficult because they earn higher income in private sector. Secondly, proper conduct of regulation is not possible.

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