Was The 2008-2009 Global Financial Crisis Avoidable?

The 2008-2009 Global Financial Crisis caused by the 2008-2009 Subprime Mortgage Crisis in the United Stated was the second worst economic crisis in economic history. It affected virtually all the economies in the world, ranging from large economies such as China to small economies such as Singapore. Simply put, no economy was spared from the 2008-2009 Global Financial Crisis. With the exception of a few economies, particularly developing economies such as China, most economies experienced negative economic growth in the 2008-2009 Global Financial Crisis, which reduced the standard of living in the economies. In economics tuition Singapore at Economics Cafe Learning Centre, the relationship between economic growth and the standard of living will be taught in Chapter 8 by the principal economics tutor. The question is, was the 2008-2009 Global Financial Crisis avoidable? To answer this question, we need to examine the root causes of the crisis which include commercial banks, the central bank, the government and households.

Commercial Banks

Banks in the United States engaged in indiscriminate lending. Although it is right and necessary for banks to lend to subprime borrowers in the mortgage market, it is wrong for banks to over-lend to subprime borrowers in the mortgage market. However, prior to the 2008-2009 Subprime Mortgage Crisis in the United Stated, banks in the United States over-lent to subprime borrowers in the mortgage market. The root cause of the problem was the link between the remuneration of the top executives of the banks and the profit performances of the banks which induced them to assume too much risk. Banks in the United States should not have such a big exposure to the subprime mortgage market. More will be explained in economics tuition Singapore by the economics tutor at Economics Cafe Learning Centre.

The Central Bank

The central bank of the United States, the Federal Reserve, raised the federal funds rate too much over too short a period of time. Due to the recession caused by the dotcom bubble burst in 2001, the Federal Reserve started cutting the federal funds rate in January 2001. By June 2003, the federal funds rate had been cut to 1 per cent. However, the Federal Reserve started raising the federal funds rate rapidly from 1 per cent in June 2004 to 5.25 per cent in June 2006. The rapid rise in the federal funds rate led to a rapid rise in interest rates on mortgages which caused the decline in housing prices beginning in September 2006 which eventually led to the 2008-2009 Subprime Mortgage Crisis. The Federal Reserve should not have kept the federal funds rate at such a low level for such a long period of time and should not have raised federal funds rate so substantially over such a short period of time. Economics Cafe Learning Centre provides economics tuition Singapore which explains how the Federal Reserve control the money supply to control the federal funds rate. Economics Cafe Learning Centre was founded by Mr. Edmund Quek who is a highly sought after economics tutor in Singapore.

The Government

The U.S. government should not have allowed Lehman Brothers to collapse. At the time Lehman Brothers collapsed which was in September 2008, it was the fourth largest investment bank in the United States. The filing of Chapter 11 bankruptcy by Lehman Brothers instantaneously led to a crash in the stock market which precipitated the 2008-2009 Global Financial Crisis. The U.S. government should not have allowed Lehman Brothers to collapse. Rather, it should have set up the Troubled Asset Relief Program (TARP) earlier which would have prevented the collapse of Lehman Brothers. You may take up economics tuition Singapore to learn the relationship between a stock market crash and an economic crisis.

Households

Households in the United States were overly naive about the trend of housing prices. Housing prices in the United States were rising from 1996 to 2006. Households in the United States expected housing prices to rise continually for an extended period of time which induced many of them, particularly the low income individuals, to purchase a house which they otherwise would not have purchased. This was a major contributing factor to the 2008-2009 Subprime Mortgage Crisis which led to the 2008-2009 Global Financial Crisis. Households in the United States should have formed more realistic expectations about the trend of housing prices. Individuals who are interested in learning the relationship between expectations of increase in housing prices and the purchase of housing may enrol at Economics Cafe Learning Centre for economics tuition Singapore.

Mark Chua

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