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The impact of the Fed’s mortgage
Response 1
The US subprime mortgage crisis was a worldwide financial collapse that occurred between 2007 and 2010. Contributing to the December 2007 – June 2009 downturn.It was initiated by a vast result of declining prices after a housing bubble fell, leading to mortgage defaults, foreclosures and the plunge in the value of financial products related to housing.The Association Bankers cautioned that the housing industry may experience a “large disturbance” due to Fed methods to help the mortgage market. The Federal Reserve, which by early 2009 reduced short-term interest rates to almost zero percent, took further steps to reduce long-term interest rates and increase economic growth.Which included buying sizeable numbers of longterm Treasury securities and mortgage backed securities, which funded prime mortgages. On 25 November 2008, the Fed declared that it would acquire debt contracts linked to entities again in what has become known as “quantitative easing,” a program of widening the balance sheet of the central bank to boost the country’s economy. The Federal Reserve also implemented a program of quantitative easing to help boost economic activity and drive down interest rates even further. Which essentially means the Fed has opted to join the debt market, buying different securities and other commodities to hold interest rates down.
References:
The impact of the Fed’s mortgage-backed securities purchase programme. (n.d.). Retrieved May 27, 2020, from https://voxeu.org/article/impact-fed-s-mortgage-backed-securities-purchase-programme
Western Asset Management. (n.d.). Retrieved May 27, 2020, from https://www.westernasset.com/us/en/research/whitepapers/the-advantages-of-agency-mortgage-backed-securities-2016-01.cfm
Response 2
According to Lins’ paper, the crisis was ended in March 2009. During the financial crisis, FED has used traditional monetary policy tools and corresponding policies to fully intervene in financial markets. First, open market operations and inject liquidity. Second, lower the federal fund’s benchmark interest rate. Despite facing inflationary pressures, FED lowered the rate from 5.25% to 4.75% on Sep.18, 2007 which is the first-rate cut since June 2003. Third, on Aug.17, 2007, FED decided to reduce the discount rate by 0.5 percentage points from 6.25% to 5.75%, and temporarily extended the discount period from the usual overnight to 30 days, and can extend it as needed. As the crisis spread and escalated, FED launched three new liquidity management tools, Term Auction Facility, Primary Dealer Credit Facility & Term Securities Lending Facility, after December 2007.
As a countermeasure to stimulate financial markets and economic recovery, FED started a $ 500 billion mortgage-backed securities purchases program on Jan.5, 2009. San Francisco Federal Reserve Bank Governor Yellen once said that the FED’s plan to purchase mortgage-backed securities will bring significant support to the real estate market. After FED announced on Nov.25, 2008 that it would implement this purchase plan, mortgage interest rates fell sharply, and mortgage applications reached the highest point in history. This effect is becoming more and more obvious. The financing cost of mortgage bonds is shrinking significantly compared to the financing cost of government bonds.
The money supply is all the currency and other liquid instruments in a country’s economy on the date measured. Increasing the money supply faster than the growth in real output will cause inflation. The reason is that there is more money chasing the same number of goods. Therefore, the increase in monetary demand causes firms to put up prices.
References:
[1] Lins, Karl V. Volpin, Paolo F. Wagner, Hannes F. Does Family Control Matter? International Evidence from 2008-2009 Financial Crisis. Social Science Electronic Publishing (2013).Print.
[2] Bernanke. Ben S, Seven. Unemployment, Inflation, and Wages in the American Depression: Are There Lessons for Europe? : Essays on the Great Depression (2009).Print.
Requirements
100 words each response
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