Federal Reserve and the Great Recession Analysis

ANSWER

Recovery of the Great Recession

The great recession contributed to the burst of the housing price bubble. The bubble was created by hedge funds and banks creating mortgage-backed securities. Insurance companies then covered these organizations in exchange for credit default swaps. This led to the demand for mortgages; hence the housing bubble was created. However, when the federal reserves raised the rates of their federal funds, mortgage interests plummeted as a reaction. Many borrowers defaulted with high mortgage interest rates, which resulted in the banking crisis, leading to the great recession in 2007 since the great depression (Gertler & Gilchrist, 2018).

The first response was from the Federal Reserve pumping $24 billion into the liquidity of the banking system. Next, $700 billion was then approved by Congress to help bail out the banks that had sunk, a program named the Troubled Asset Relief Program. Finally, former president Barrack Obama proposed a $787 billion economic stimulus package to help bail out the sunk banks (Gertler & Gilchrist, 2018).

These corrective measures helped restore economic stability. Had Congress and the federal funds not contributed to the rescue of the banks, this would have resulted in the second great depression. More people were also able to get employment opportunities, as the great recession had contributed to the unemployment of 10% of the population (Shambaugh & Strain 2021).

The Troubled Asset Relief Program allowed the curbing of any future and unforeseeable economic strains by Congress passing the Troubled Asset Relief Program. This program will bail out banks in the event of another financial crisis. The American Recovery and Reinvestment Act (ARRA) passed by Congress also allows the banking and other financial sectors to be safe in another financial crisis (Shambaugh & Strain 2021). It also monitors the financial progress of these departments to make sure they avoid any triggers that may lead to another recession.

References

Gertler, M., & Gilchrist, S. (2018). What happened: Financial factors in the great recession. Journal of Economic Perspectives, 32(3), 3-30.

Shambaugh, J., & Strain, M. (2021). The Recovery from the Great Recession: A Long, Evolving Expansion.