Us Subprime Mortgage Crisis

The US subprime crisis era from 2007 to 2009 posed an unprecedented challenge to the US Federal Reserve (“the Fed”) as well as the outgoing Bush administration and incoming Obama administration. US Subprime Mortgage Crisis Crisis: Policy Reactions (“the Case”) provides us a glimpse of the actions by the Fed, the two administrations, as well as the support and criticisms for those actions. The US as a whole generally disregarded “common sense” leading up to the downturn and crisis. An overheating economy had been ignored for too long, loans were extended to individuals and entities with little to no income and who lacked the sophistication to understand the nuances and ramifications of new financial products created to yield higher returns for investors with voracious investment appetites, and the worst fears of laissez-faire economics were realized due to unregulated business practices with little to no oversight or full understanding of those new financial products.

The Case highlights the tools used by the Fed in monetary policy during the economic downturn and crisis in the housing and commercial real estate markets and can be reflected on in terms of standard utilization as well as non-standard utilization. With respect to standard utilization of monetary policy, the Fed can influence the Fed Funds Rate, which is the rate at which commercial banks and other depositary institutions can borrow money from the Fed. The Fed members meet at the Federal Open Market Committee eight times a year, seven weeks apart to establish the fed funds target rate. To reach this target rate, the Fed conducts open market operations in the buying and selling of government treasuries to influence the money supply. Essentially, when the Fed is looking to inject money into the economy, the Fed purchases the bonds, which in turn raises the bond prices and effectively decreases the interest rate. Alternatively, the Fed may choose to sell treasuries, reduces the amount of funds...