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Title: To what extent the financial crisis 2008 can be seen as a failure of the US government?
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    Descriptions
    Page No.
    1. Introduction
    3
     II.    Key objective of the study     
    4
    III.    Review of the literature
    4
    IV. The credit crunch:
    5
    V. The Great Recession of 2008 and government failure:
    6
    VI. Fed has repeatedly lowered the Federal funds rate:
    7
    VII. Role of Greenspan
    8
    VIII. Financial crisis could be prevented
    9
     IX. Policy instruments that could avert the financial crisis
    10
    X Conclusion
    11
    XI. References
    13
I. Introduction:
The financial crisis that started during summer 2007 and intensified in September 2008 is identified as one of the severe and worst economic crises since The Great Depression. The global economic meltdown has caused a massive economic contraction in US and European countries. This massive macroeconomic shock not only hit the advanced economy not only hit the advanced economies like U.S or European Union but also spread over to the emerging economies across the world. It was one of the worst recessions since the world war II. The consequences are severe and far reaching. United States was hardly hit- millions of people around the nation were adversely affected.
It is very hard to figure out the single most reason behind the financial crisis of 2007-2010. The seeds are not sown in a single day, it has developed gradually overtime. Huge foreign borrowing, excessive loose monetary policy, sustained low interest rate, reckless lending practices and many other factors contributed to the crisis. The relative importance of different factors are still issue of serious debate. Even after ten years of the crisis, significant disagreement still persists among the researchers and the policymakers on that fact that what caused such an intense financial imbalance across the world. While most economists agree inadequate supervision and the loose regulations are the primary cause others believe that overly accommodative monetary policy accelerated the financial imbalance in the system that ends up with financial crisis.
Thus it is imperative to examine the key factors that primarily contribute to such a massive economic meltdown. The current study puts an attempt to unfold the role of government and its policies, if any, behind such a massive economic calamity.
II. Key objective of the paper:
The key objective of this paper is to examine how government failure caused the financial crisis. The paper has made a critical assessment on the fact that financial crisis of 2008 was an outcome of government failure. The recent study investigates how government failure has played a leading role in creating the conditions that led to the Great Recession. The paper provides a deep insight how the flawed government policies impacted the economy.
III. Review of the literature:
Fed policy has played the central role in causing the financial crisis as explained by the Stanford Economics Professor John Taylor in his book “Getting off Track”. The true cause of the financial crisis, as he explained, went back to the hundreds of years was due to monetary excesses. We had the housing boom and bust that has created huge economic turmoil in United States and spread over across the world. He advocates monetary excess is the key cause behind the housing boom and the resulting bust. Taylor has concluded that extra easy monetary policy by Fed for a sustained period has accelerated the housing boom and then led to the housing bust. (Ferrara, 2011)
Simon Johnson, MIT sloan School of Management professor and the former chief economist at the IMF from 2007 to 2008 has written in the article The Atlantic about the role of business interest of powerful elites in creating the devastating crisis. He strongly believed that powerful elites have taken many risks out of their interest and with the implicit backing of government which finally end up with inevitable collapse. (Reavis, 2012)
David Beim , a finance professor at Columbia Business School believed that the problem does not only with the banks or greed of the powerful elites, the borrowing behaviours of average US people also played a critical role here. The standard of loving has been rising for last 25 years and borrowing helps to make such prosperity happen. The people of US are overborrowed which they are doing for many years and now it has ultimately reached to an unbreakable peak where the average borrower failed to repay the debts they have got. (Reavis, 2012)
Tobias Adrian Hyun Song Shin (n.d) provides strong emphasis on the role of financial institutions during the recent global crisis. The role of financial intermediation and their integration between banking and capital market developments have significantly changed over the years. The changing role of financial intermediation has undergone huge transformation that has profound influence in the financial crisis (Tobias Adria Hyun Song Shin, 2010).
IV. The credit crunch:
The global financial crisis that has started in July 2007 and intensified in 2008 was deeply rooted in the credit crunch. When investors lost their confidence on subprime mortgages a massive liquidity crisis has been observed. The situation has gone out of control when Lehman Brothers finally collapse. The entire financial system came breakdown when no one believes anybody – everybody stopped lending finally. Even the banks were reluctant to lend to other banks and it came as a huge blow to the global financial system.
The collapse of subprime mortgage market as well as the bankruptcy of Lehman brothers caused the risk premium to rise sharply. The number of defaulters has dramatically increased.
According to Bernake, 16% of subprime mortgage were in default by August 2007. It was a vicious cycle – low housing price led to more default. (Charles I. Jones, May 22, 2009). At a point of time, banks realized that the price of land and home became much less worth than the loan they made earlier. Banks find it very difficult to recover the loans and experienced huge liquidity crisis. The burst of subprime lending bubble is popularly known as the credit crunch and the root cause of the crisis. (Davies J. 2014).
V. The Great Recession of 2008 and government failure:
The origin of the Great Recession was widely attributed to market failure. This usually refers to the bad loans and also the excessive risks taken by the banks in order to increase their profitability. Despite the fact that banks did perform badly, we cannot overlook the government behaviour that also contributed rather prolong...