The crisis or the housing bubble of the United States was a real estate problem that negatively and significantly affected more than half of America. It had severe consequences, including the most serious economic recession in the U.S. since the 1930s Great Depression. The purpose of this paper is to discuss the economic causes of the housing crisis and how it led to the 2007-2009 recession, evaluate the federal government’s response to the recession, and recommend changes in policy.
Even after more than a decade, the housing crisis’s underlying factors are considered to be rather severe and complex. Its causes are believed to be speculative fever, failure of regulators to intervene, tax lending standards, historically low-interest rates, and tax policy. What is more, unregulated markets and predatory private mortgage lending are also considered to be the reasons for the housing crisis to begin and become so serious. The recession of 2007-2009 was one of the most dangerous consequences.
After the peak of the recession, there was a severe response to it, including the Federal Reserve’s and some other central banks’ aggressive monetary policies. It is believed that these policies prevented even more serious damage to the global economy, but they are also criticized for laying the foundation for later recessions. For instance, to promote liquidity, the Fed reduced a key interest rate to almost zero and provided banks with emergency loans worth $7.7 trillion, which is helpful considering the costs and benefits concept. As for the U.S. Federal government, it started a massive fiscal policy program, which means the influence on supply and demand. These fiscal and monetary policies reduced the immediate losses to large corporations and financial institutions, but also kept the economy locked in the same structure that has caused the crisis.
As for the possible future changes that would be beneficial to incorporate, it is appropriate to start with making sure that the government regulates the financial industry. In other words, it is necessary to curb toxic mortgage lending, which is rationalized by the costs and benefits concept. In addition, I would use the scarcity concept by not letting too many financial firms take on too much risk. If it is not possible to provide the same scrutiny or regulation for all banking systems, it is better to close or severely restrict the shadow one.