Securing Higher Grades Costing Your Pocket? Book Your Assignment at The Lowest Price Now!

Financial Crisis Of 2008 And Formulation Of Economic Policies Add in library

390 Download4 Pages 900 Words


Discuss the reasons for policy formulation and implementation and policies formulated and their nature?




The Great Recession roots back to 2004 when there was a sudden increase in interest rates in the housing sector. This increase resulted in increase in defaulters of subprime mortgages throughout America. Later in 2007, this came to be known as the “Subprime Mortgage Crisis”. As a result, biggest mortgage firms became insolvent. This crippled the secondary mortgage market and an increased unemployment. The real estate and the banking sector collapsed.

Reasons for policy formulation and implementation

The situation continued and by 2008 two of the housing giants in America; Fannie Mae and Freddie Mac filed bankruptcy and announced that they would not invest in risky RMBS or CMBS through securitization. This affected big hedge firms such as Bear Stearns, a large portion of whose capital base was tied up in subprime mortgages. Large business houses announced their inability to cope with the situation and wanted to revise their financial statements. International finance organizations closed doors for American firms as a fair valuation of the firms were unable to be arrived at. The stock market lost points rapidly as high interest rates discouraged the investment mentality of multinationals. In such a volatile investment scenario, credit rating of American securities and companies fell to a great extent as rating agencies downgraded them to lowest investment ratings. The banking sector suffered tremendously and there was gigantic increase in NPA’s and they had no option to clear their balance sheets. Ultimately, the fall of Lehman Brothers market the beginning of the financial crisis. Economic growth came to a halt with an increase in the unemployment rate to almost 8% (, 2015).

Policies formulated and their nature

The crisis made business environment in the country volatile with an acute unavailability of investment opportunities. Consolidated fiscal policies were required to be taken to counter the situation and bring about stability in price fluctuations. Thus, the following economic, fiscal and monetary policies were formulated and implemented by the administration:

Dodd-Frank Act and Consumer Protection Act

Objective of passing the act was to prevent the collapse of financial intermediaries such as banks, stockbrokers, insurance companies etc. Systemically important institutions and core investment companies availed a protection under this act in case they required a bailout by the government.

Bailing out of money market mutual funds

The Treasury department announced a financial assistance of $50 million for money market mutual funds to secure their investments. Short selling was terminated for a substantial number of stocks and changes in the required regulation were undertaken.

Bailing out Fannie Mae & Freddie Mac

The Federal government utilized the $700 billion fund, Trouble Asset Relief Programme (TARP) to bail out the housing giants and buy other mortgage backed securities to stabilize the housing sector (2015).


Other Legislations passed

In an attempt to stabilize the market the following legislations were passed:

  • Emergency Economic Stabilization Act, 2008 with a bailout corpus of $700 billion
  • Stop Fraud Act which increased penalty for defaults in mortgage payments
  • American Reinvestment and Recovery Act (ARRA)

Other measures taken

The following are the other major initiatives taken under the new economic policy:

  • Creation of a stimulus of $787 which was later increased to $862
  • Tax reliefs in the form of cuts
  • Government repurchases in tranches for two years
  • Passing of agriculture and Housing Bills in 2007
  • Additional mortgage relief subsidies
  • Lowering of interest rates to promote investment
  • Debt reliefs to increase consumption
  • Measures to increase employment opportunities
  • Constitution of major commissions and boards to regulate and monitor the financial system and market

Analysis and Conclusion

Economists and scholars of political science describe the natures of the policies undertaken by the Obama administration to be similar to Keynesian theories as the policies deal with the acute problems of unemployment, tax structure and government expenditure. The government expenditure multiplier played a pivotal role in the policy formulation. The total expenditure during the period was estimated to be $4 trillion and the multiplier was calculated to be more than one which turned out to the most significant factor (2015).

The policy measures somewhat were not up to the mark and the growth of the economy did not prove to be robust. The targets were missed by miles and the fragile situation of the regulatory environment proved disastrous. The inverse relationship of real GDP and unemployment was severe and the promise of price stability was not fulfilled by the administration. Though the choice of the policies seemed rational, but the politics of the elite was evidently visible. Big firms were bailed out without any inconvenience but the common people of the country had to face the wrath of the Stop Fraud Act. Due to the unfortunate fact of massive downsizing ratio of debt obligations and disposable income reached almost 135% (2015). The policies failed to repose the confidence of the investors and rising debt diminished consumption patterns. Thus, a number of political theories were evident in the economic policies.



(2015). Retrieved 12 July 2015, from

(2015). Retrieved 12 July 2015, from

(2015). Retrieved 12 July 2015, from,. (2015). Which Federal Policies Help or Hurt Economic Growth?. Retrieved 12 July 2015, from

OR has appointed best assignment experts who are wizards of words. Our writers know every trick of crafting high quality write-ups within a short period. With years of experiences, we have become one of the most prolific assignment help services in the USA. We deliver custom-made help to students with writing different types of assignments. We guarantee total need-based and timely service, and this is why increasing numbers of students prefer to buy assignment online.

Most Downloaded Sample of Management

277 Download1 Pages 48 Words

Toulin Method Of Argumentation

You are required to write a researched argument essay that convinces persuades the reader of your position / stance. This is an academic, researched and referenced do...

Read More Tags: Australia Arlington Management Management University of New South Wales Management 
202 Download9 Pages 2,237 Words

Consumer Behavior Assignment

Executive Summary The purpose of this report is to elaborate the factors which are considered by individuals before selecting an occupation. Choosing an occupati...

Read More Tags: Australia Arlington Management Management University of New South Wales Management 
368 Download13 Pages 3,112 Words

Internet Marketing Plan For River Island

Introduction With the increase enhancement in the field of technology, it has been considered essential by the businesses to implement such technology in their b...

Read More Tags: Australia Arlington Management Management University of New South Wales Management 
328 Download9 Pages 2,203 Words

Strategic Role Of HR In Mergers & Acquisitions

Executive Summary In a merger & acquisition, role of an HR has emerged as a very critical function. At each stage of merger and acquisition process, HR plays a s...

Read More Tags: Australia Arlington Management Management University of New South Wales Management 
357 Download7 Pages 1,521 Words

Relationship Between Knowledge Management, Organization Learning And HRM

Introduction In this competitive business environment where every business organization is trying to attract the customers of each other, it becomes essential for ...

Read More Tags: Australia Arlington Management Management University of New South Wales Management 
Free plagiarismFree plagiarism check online on mobile
Have any Query?