|Economic Crisis And policies to deal with it |
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I would say that the economic crisis is a very big topic to speak about it in some few paper but because I really interested in it and I am up to date with it news I choose it I may not speak about every thing in this topic but I tried to get the important side for me for this topic may some of point copied from some copied but it s a fact I can’t write it as I want
Brief about the Crisis :
Following the burst of the ‘dotcom’ bubble in 2000 and the 2001 terror attacks on the United States, the US and most other advanced economies embarked on a period of Sustained expansionary economic policies to ward off recession. The Federal Reserve, for instance, lowered its discount rate no less than 27 times between 2001 and 2003.
Low interest rates, facilitated by the huge trade surpluses which China and other countries used to purchase US Treasury Bonds, stimulated rapid growth in credit.
Accompanying rises in house prices further fuelled credit growth, especially through mortgage lending. In the US, subprime market mortgage lending, to households without the essential means to repay loans, took on huge proportions. About US $1.3 trillion was lent in subprime mortgages. US mortgage lenders, most Infamously the institutions known as Fanny Mae and Freddie Mac, securitized these subprime loans, which were then sold throughout the financial system as assets. They were able to issue and securitize these bad loans due to a combination of inadequate regulation and financial innovation. The latter made it difficult for other institutions to assess the risks of these securitized mortagages and led to increased subprime mortgages.
Thus in spite of their underlying risk, they were taken up by financial institutions. They were promoted as ways to spread risk, making investment safer. What they did instead—aside from making their creators a lot of money, which they didn’t have to repay when it all went bust-was to spread confusion, luring investors into taking on more risk than they realized.
Two factors in particular have encouraged asset managers to throw caution to the wind:
the growing global economy and their pay incentives. Risk-management tools now seem to have been inadequate in properly assessing risk during the upswing in the global economy. Rating agencies in particular seem to have been awarding high ratings much more easier under favorable growth conditions.
Wall Street has been the top tier of the corporate pay range, with executives earning eight-figure salaries. Its bonus system, which rewards short-term trading profits, has been singled out as an incentive for Wall Street executives to expand their highly profitable business in exotic securities and ignore the risks.
By the summer of 2007 increasing defaults on mortgages and growing numbers of foreclosures in the US signalled that the subprime market was in crisis. House prices and financial stock prices started to plummet. This reduced the value...