Live Chat
Toll free:


Today, most of the world’s leading experts compare the economic crisis in 2008 with the Great Depression (1929-1932). Both crises began in the United States with the financial sector followed by the collapse of stock markets, falling of consumer demand, rising unemployment, and devaluation of money. Both of these periods in the history of economics caused thousands of tragedies by depriving people of homes and savings which they kept in the U.S. dollars. The financial crisis in the United States began at the end of 2006 from the mortgage crisis in the Gaza subprime (substandard loans), which appeared because of the bubble in the mortgage market caused by low interest rates, excess liquidity, and frivolous attitude of mortgage companies to borrowers. A worldwide chain reaction was a result of the fact that mortgage companies, trying to get out of the plight of the poor-quality mortgage-steel, sold mortgage loans to institutional investors in the U.S. and other countries. Two principle questions that will be discussed in this paper are the causes of the US subprime mortgages meltdown and ensuing 2008 US systemic banking crisis; and the US government response to the crisis.

Type of service
Type of assignment
Academic Level


As to the first issue, it should be mentioned that journalists dubbed the situation on the U.S. mortgage market as “soap bubble that burst.” In summer 2005, the demand for real estate in the United States was huge; homes and condos were sold in just a few days of being on sale. Then a year later, in 2006, the situation changed; the market was frozen and the prices slowly went down. So, what happened? During the rapid growth of prices (15-20 % per year) Americans willingly took mortgages so that after a while to resell the house profitably. The banks readily joined this “game” and reduced the requirements for borrowers and issued a huge number of so-called risky loans, i.e. loans to people whose financial reliability was not accurately checked due to lack of credit history. As a result, the volume of risky mortgages in the U.S. in 2006 exceeded $600 billion; it is about 20% of all U.S. mortgage market. When real estate prices first stopped and then started to decline, and interest on loans raised, borrowers began to refuse making monthly payments on debts and started to leave their creditors.

American banks were the first that felt financial crisis. The largest mortgage lender in the U.S. Countrywide Financial Corp. led the decline of financial sector, saying that it encountered unprecedented challenges. The head of the Federal Reserve System of the USA, Ben Bernanke, said that the losses of the U.S. financial system from the mortgage crisis would be at least $100 billion in the period from 2006 to 2008.

The Federal Reserve Bank started buying up massive mortgage bonds by allocating it to $43 billion. Further news reminded “military reports”: just in 4 days the central banks of the U.S., EU, Japan, and Canada dumped on the world’s financial markets more than 326 billion dollars to support the global credit system. Their efforts brought certain results because the most important global rate, LIBOR, was returned to the familiar figures, the crisis slowed the pace of expansion, but how exactly it would be developed further, any specialist could not predict today. However, it was obvious to all that the crisis in the U.S. mortgage market would affect the whole world.


As to the second question, United States failed to impose targeted measures to address the mortgage crisis. The entire world expected from the U.S. government a package of measures to support the economy. The markets believed in the possibility of rehabilitation of the economy, leading to a local increase in the indices of about 5.7%. However, no clear action followed. That is why the stock indices from October 2007 until the end of 2007 despite the gradual disclosure of the damage pattern gradually decreased by about 10%, in spite of the further reduction of interest rates, hold on October 31 and December 11 at 0.25%.

To solve the problem, in the beginning of December, the United States was suggested to use a plan to help troubled mortgage borrowers, which was based on a proposal to freeze the interest rates on loans for a term of 5 years and a possible refinancing of loans. But the panic which lasted in the USA, Asia, and Russia from 16 to 22 January showed that the markets began to believe that measures to combat the crisis in the U.S. were not enough because it was clear that another rate cut was near. The situation somewhat stabilised only after an extraordinary measure – an extraordinary rate cuts undertaken by the Federal Reserve on January 22, just 0.75 percentage points – to 3.5% per annum. The Fed had no choice as to support the stock market despite the fact that many took this measure not unique.

On January 30, the Federal Reserve System continued its line; it lowered the rate by another 0.5% to 3.0%. However, there was too much negative news working against the market – the decline in business activity index, reducing the rating of insurance companies. The U.S. authorities indicated that the economic recovery was for them much more valuable than the risk of rising inflation. The point is that adjusted for inflation, the real rate goes into the negative range but the stock of progress for the Federal Reserve System is getting smaller. Falling rates may cause inflation, and then have to raise rates. Rate reduction saves only creditworthy borrowers but a significant portion (e.g. having taken a loan with deferred payments and for speculative purposes) will continue to have problems. However, the crisis of non-payments can go to the real estate market for auto loans and credit cards.

At the beginning of “Bear Week”, President Bush finally announced a plan for reorganisation of the economy, which was based on proposals for stimulating spending through tax deductions. However, at that time the markets regarded these measures as insufficient and continued to fall. On February 8, 2008 the Senate still approved this program. Amount of aid to the economy should be around 167 billion dollars, in the form of tax deductions for about 117 million households in the range of 600 to $1,200 per family. At the same time, it is clear that these measures were not aimed directly at the node isolation of mortgage, but to a great extent on demand support. Growth in the construction sector supported the national economy, but it exhausted itself. Therefore, the market was overstocked with houses for sale on non-performing loans and homes bought in the hope of reselling. All this was caused by the last cycle of rate cuts. In November 2007, the average home value was declined over the same period from 221.6 to 208.4 million dollars that was 6%. By some estimates, the fall of prices and overall rate reduction can again repeat the situation with subprime – new borrowers, attracted by low interest rates may again fall into the trap, though their requirements will become much more stringent.


The United States faces a difficult and important controversial task. On the one hand, it is the refinancing of debt that requires stability of the dollar and fairly attractive rates. On the other hand, it is the recovery of the economy and overcoming the crisis and the global solution of the debt problem – low rates, a weak dollar, and even better its gradual but profound devaluation. The rate reduction is working in the right direction leading to a weakening of the dollar but can cause inflation. An excessive rate cuts can result in a massive outflow of capital. In connection with the depreciation, many countries will reduce the proportion of their foreign exchange reserves in the U.S. dollars, which will further push the falling of the U.S. currency. However, central banks with reserves in dollars are attached to it. Upon the sale of these assets, dollar will decline faster, thus accelerating depreciation reserves. In addition, the fall of the dollar will reduce exports to the U.S., for example, from China and Japan, and the strengthening of the euro will have a negative impact on the American economy.

Related Essays:
  1. Qualities of Henry V, King of England
  2. Nuclear Energy as a Source of Power
  3. Stress and Violence in the Workplace
  4. Philosophy of Religion in Miracle
  5. Aristotle and Haidt about Happines
Discount applied successfully