ECON 201 Financial Crisis Research Paper
Several factors contributed to the 2007-2008 financial crisis. The downfall of the housing market is seen as the primary cause for the Great Recession, of which it was influenced by easy credits, toxic subprime mortgages, low interest rates, as well as insufficient regulation. However, the financial crisis was perceived as an unavoidable disaster caused as a result of widespread failures, such as risky behavior by Wall-Street and government regulations (Liang & Dong, 2018). For instance, since subprime mortgages were granted to individuals who formerly could not qualify for the conventional mortgages, it resulted in the market being flooded by new homebuyers (DesJardine, Bansal & Yang, 2019). Also, easy credit on housing led to homes being highly demanded, and eventually resulted in the run-up of housing prices.
Monetarism school of thought can significantly help in resolving financial crisis like the 2007-2008 financial crisis. Monetarism often uses monetary policy as an implemented economic tool for adjusting interest rates, which in turn, helps controlling the supply of money in the economy. Increasing interest rates through monetarism results in individuals having more of an incentive of saving rather than spending, thus contracting or reducing money supply. Obstinately, lowering interest rates after an expansionary monetary scheme results in the costs of borrowing decreasing, meaning that individuals would be capable of borrowing more and even spending more, hence stimulating the economy by resolving any financial crisis (Nair & Anand, 2020). However, monetarism school of thought also holds that a monetary policy should be implemented by targeting the money supply growth rate to help in maintaining price stability and growth rate.
DesJardine, M., Bansal, P., & Yang, Y. (2019). Bouncing back: Building resilience through social and environmental practices in the context of the 2008 global financial crisis. Journal of Management, 45(4), 1434-1460.
Liang, J. J., & Dong, Z. (2018). How the 2007 global financial crisis changed the financial disclosure behavior: The case of US equity REITs. Property Management.
Nair, A. R., & Anand, B. (2020). Monetary policy and financial stability: should central bank lean against the wind?. Central Bank Review, 20(3), 133-142.
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