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The 2008 financial crisis in the US – Reaction Paper

Contemporary US Business and Society

The 2008 financial crisis in the US led to the economic meltdown, an increase in unemployment rate, inflation, crash in the stock markets, and the collapse of financial institutions (Allen & Carletti, 2010: 1). The financial crisis had its roots in the low interest’s rates adopted by the US Central Bank and the Federal Reserves that encouraged many Americans to take mortgages in the hope to increase home ownership. Ofcourse, the development plan was good, but the financial institutions did not apply strict measures in their lending.

Financial institutions issued out loans without strictly scrutinizing the revenues statuses of the borrowers to repay. The move taken by most of the US financial institutions were unfortunate and unprofessional because recessions normally stem from increased leverages, especially in the housing sector and increased loan defaulters as house prices decrease and the subsequent increase in interest rates.

The poor management of the financial institutions ended up affecting the entire economy as banks found it hard to carry out their operations due to the high operating costs as loan defaulter’s increased that translated to massive losses. Subsequently, government debt increased as there was a reduction in tax collection due to the reduced business activities and thus government spending had to be reduced and institution on the verge of collapse needed a bailout.

Some banks such as the Lehman Brothers collapsed in the process, and most manufacturing industries reduced their production due to reduced market not only in the US but the entire world. The US government implemented radical reforms in its fiscal and monetary policies to curb the crisis, some of which included bailing out the financial institutions, restructuring of the banking regulations and minimizing global trade imbalances to restart the economy (Temin, 2010: 2-3).

References

Allen, F., & Carletti, E. 2010. An Overview of the Crisis: Causes, Consequences, and Solutions. International Review of Finance, 10(1), 1-26.

Temin, P. 2010. The Great Recession & the Great Depression. Daedalus, 139(4), 115-124.

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