Problems and Solutions of the Subprime Mortgages Crisis in the USA (2007-2010)
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6P&S OF SUBPRIME MORTGAGES CRISIS IN THE USA (2007-2010)
Introduction
The goal of the present paper is to analyze problems and solutions of the Subprime Mortgages Crisis. This paper will focus on the events of the crisis occurred between 2007 and 2010 in the USA.
Problems of Subprime Mortgages Crisis
The Subprime Mortgages Crisis caused serious problems, such as a slowdown in the USA economy, a large increase in unemployment levels and billions in bank losses. The U.S. subprime mortgage industry collapsed in 2007. More than 25 subprime lenders announced significant losses and declared bankruptcy. In August 2007, the number of residential foreclosures increased 93 percent in relation to July 2006. The crisis resulted in a profound decline in output and employment.
The foreclosure resulted in 524,000 fewer jobs being created in 2008 and losses of $6.6 billion in tax revenues in 10 states. Due to these massive losses, the financial institutions reduced both their capacity and their intention to take risks.
Solutions to reduce the Subprime Mortgages Crisis effects
Seven of the largest central banks in the world, including the Federal Reserve Bank of the USA, declared the reduction of interest rates at the same time. The US Congress authorized the financial rescue plan, with 900 billion dollars.
The Federal Reserve injected capital into the financial market to bring high liquidity. The injections of various countries increased considerably, especially after Lehman Brothers went bankrupt. The United States banned the short selling of stocks; the Securities and Exchange Commission of the USA issued new regulations to guarantee the transparency of the operations.
Finally, there was cooperation between several countries; the American Federal Reserve Committee had achieved a currency exchange agreement with the central banks of Europe, the United Kingdom, Japan, Canada, and Switzerland to reduce the lack of liquidity in the financial market.
Conclusion
This study has illustrated the subprime mortgage crisis and the measures adopted by the US government and the Federal Reserve Bank. This investigation has a number of limitations to be considered in evaluating its findings.