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How Government Economic Policies Caused the Financial Crisis of 2008

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The financial crisis in 2008 that led to a crisis in the banking sector, and which nearly led to a complete collapse of the economy globally, was not only caused by changes in the regulatory, regulation and legislation oversight, but also fiscal and monetary policies. Many believe that, expansion of excesses monetary and irresponsibility of some of the government agencies led to the crisis. According to reports by Taylor (2009), excesses monetary policies were the main cause of the 2008 financial crisis. He reports that, in 2003-2005 the federal reserves held its interest rate target below the well known monetary rules that state that historical experiences should be the base of a good policy. He says that, Federal Reserve tracked their rates according to what worked better in the earlier decades, instead of lowering the rates in order to prevent the crisis. Taylor supports his claims with evidence given by researchers from the Organization for Economic Cooperation that was corrected from other countries showing that the higher the monetary excess the larger the boom in the housing sector. The crisis was worsened by other factors which included adjustable-rate mortgages and subprime use; this led to excessive taking of risk. Evidence shows that, excessively low rates led to the excessive taking of risk. Housing inflation were inversely related to both foreclosure and delinquency rates. The rates dropped drastically over the years which led to increased house prices that almost collapsed the mortgage programs. As a result of the crisis in subprime mortgages, the Troubled Asset Relief Program (TARP) program was introduced in the beginning of October 2008 by the United State government that enabled the purchase of equity and as... ... middle of paper ... ...s that had surpluses back to the country. Works Cited Kaminsky, G., & Reinhart, C. (1999). The Twin Crises: The Causes of Banking and Balance of Payment Problems, American Economic Review, 89, (3), 473–500. Killoren, G.D. (2009). How Government Economic Policies Caused the Financial Crisis of 2008. Retrieved from http://rawfinanceblog.com/2009/07/23/how-lax-u-s-monetary-policy-contributed-to-the-financial-crisis Lothian, J.R. (2009). U.S. Monetary Policy and the Financial Crisis. Journal of Economic Asymmetries,6 (2), 25-40. Mankiw, N.G. (2010). Questions about Fiscal Policy:Implications from the Financial Crisis of 2008-2009. Federal Reserve Bank of St. Louis Review, 92, (3), 177-184. Taylor, J.B. (2009). How Government Created the Financial Crisis. Wall Street Journal. Retrieved from http://online.wsj.com/article/SB123414310280561945.html
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