Policies of the FED during the 2007-2009 Recession and Fiscal Crisis
The government played a significant role in the financial crises of 2007-2009. The government failed to properly regulate the financial and banking sectors. In addition, it forced banks and financial institution to advance loans and mortgages to undeserving borrowers (Media, n.d.). Although the government has noticed early sign of the crunch, it misdiagnosed the signs and gave wrong responses leading to an economic meltdown (Taylor, 2009).
Fannie Mae and Freddie Mac played a rather insignificant role to the financial crisis. At the start of the mortgage bubble the company had lost a large position of their mortgage market and wanted to regain it (Griffith, 2012). They made tragic mistakes from 2006 to 2007. It reduced its leverage and increased investment invested in credit agencies and securities that were deemed low-risk wrongfully (Griffith, 2012). They also reduced their underwriting standards which opened their doors to fraud. As a result the company got massive loses and only depended on a government bailout to continue operating (New York Times, 2013). With many pension schemes and investors holding the companies securities the failure of the company greatly contribute to the crisis.
The Fannie Mae and Freddie Mac contribution could have been prevented had the two companies not ambitious tried to recover their market when the market bubble was almost bursting and had they not lowered their underrating standards invested in risk securities and advanced loans to undeserving customers.
The government could not have responded different to the crisis although some of the solution the government made aggravated the crisis. The economy would not have recovered without the economic stimulus packages the government issued (Media, n.d.).
Investment banks investment banks, and Freddie Mae and Fannie Mac should not have been â€œbailed out.â€ Tax payers’ money should not have used to bail out any company from a collapse they had found themselves in due to their own greed (Griffith, 2012).