2008 Financial Crisis Essay

This caused a liquidity crisis, in which the volume of exchanges in the market declines and makes it hard to find the value in assets. By September 2008 the crisis became far worse when the risks expanded from 1% to 4.5% and everyone panicked as they knew a financial disaster set in. Interest rates would spike making credits cease to function and this resulted in investments declining at a fast rate by more than 30%. This sent a large shock to aggregate demand followed by a continuous decline in the stock and housing markets. This would reduce household wealth and consumption as well, which was once a provider of a secure channel where aggregate demand sank. This is when the government decided to step in and take financial control of a few mortgage

The Federal Reserve bought assets from banks and paid for these purchases by crediting their reserve accounts. The banks kept the funds as their reserves with the Fed instead of lending them to private clients. The reason for not lending those funds in the private sector is owed to the fact that the banks were concerned for their own balance sheets and didn’t want to risk making loans in a bad economy. Also the Fed was paying high interest on surplus reserves, which made it a safe investment for banks. Since the Fed adjusted the interest rate they were able to control the amount of additional currency being admitted into the economy. Funds were used to purchase equity in banks and other financial institutions so the Fed can guarantee its’ loans to them. Their focus was to bail out the automobile industry as it was one of the nation’s most profitable industry. Finally with the American Recovery and Reinvestment Act, a $787 Billion package was put in place to enhance aggregate demand into the economy. The package has over $250 billion in tax cuts as well as $500 billion for the government to spend on unemployment, infrastructure, education,