Economics

Unit 5 Case Study – Due 12/06/2014

By increasing the money supply, the Federal Reserve can lower interest rates. This has a broad impact on the economy as mortgages, business loans, etc. can be obtained less expensively. Some economists believe that the money supply increases contributed to a housing bubble and the subsequent housing market crisis of 2008-09. They suggest that this event is an example of how the Fed can create recessions by artificially encouraging bad investment decisions, and that the same pattern can be seen in the tech stock bubble of the late 1990s and other recessions even as far back as the Great Depression.

Evaluate this view of the cause of recessions. Do you agree or disagree? Why?

Though your answer needs to be correct in terms of economic theory (be sure to read the assigned chapters), creativity and diverse opinions are strongly encouraged.

For your main (initial) response, construct thoughtful and detailed responses to the Discussion. After your initial response, post at least two substantial responses to your classmates and instructor’s posts in order to earn full credit.

The Federal Reserve has the means to create recessions and the means to fix the recession by adjusting the prime interest and infusing money into the economy. At the same time banks and lending institutions were over valuing properties and originating loans which went above the actual value of the properties, which lead to the collapse of the housing market. Property values decreased and the debt was increased. People were losing their jobs and unable to pay the high mortgage payments and defaulted on the loans. The banks did not have enough assets to cover the loan defaults and had to go back to the Federal Reserve for help.

Citigroup is a prime example, “its collateralized debt obligations (CDOs) alone were worth more than the equity value of the bank, forcing it, in subsequent weeks, not just to search for new investors, but to offer the latter...