The Burns Case

The president needed those changes in the economy to ensure reelection. However, with time, it is because apparent that the policy measures undertaken by Burns were harmful. It took more than ten years to keep inflation under control when the FED was under the control of Volker. Several lessons can be learned from this incident. First, decisions made by the Federal Reserve Bank are not immune from political manipulation. While on paper Federal Reserve Bank appear independent and free from political manipulation, politicians in practice have become adept at influencing policy issues. In the case of Burns, he was severally accused of engaging in unethical activities. Stories were planted in the media to destroy his reputation. In the end, he succumbed to political pressure and make decision

The problem that caused the crisis was the illiquid nature of the toxic assets. In the US mortgage market, the loans are de facto or de jure ‘no recourse’ which means that the debtor cannot be held personally for the loans even if the bank get a fraction of the total mortgage in the event of a foreclosure. Without recourse, the debtor has a put option to sell to the issuer of the mortgage for the loan outstanding in the case he or she is unable to pay the debt. Ideally, banks should consider the put option when evaluating the value of the mortgage. Put option is essentially the right the bank has to sell an underlying assets or the house if the owners is able to pay the service the mortgage. In 2008, bank found themselves with mortgages for which the owners were unable to service and this required the bank to exercise their put option after foreclosure. In a similar manner, the government places a put option with banks, reserving the right to sell underlying assets the bank has in case the bank is not able to meet its