ECONOMICS
MONETARY POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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unregulated business control of the economy
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the lack of social safety nets.
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the domino effect of bank failures.
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None of the above
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Detailed explanation-1: -The Bottom Line The Great Recession lasted from roughly 2007 to 2009 in the U.S., although the contagion spread around the world, affecting some economies longer. The root cause was excessive mortgage lending to borrowers who normally would not qualify for a home loan, which greatly increased risk to the lender.
Detailed explanation-2: -The biggest failures were not banks in the traditional Main Street sense but investment banks that catered to institutional investors. These notably included Lehman Brothers and Bear Stearns. Lehman Brothers was denied a government bailout and shut its doors.
Detailed explanation-3: -Banks could see three effects, small or large depending on the scenario: a slowdown in volume growth, higher costs, and greater delinquencies. Start with volumes: payments and transactions will slow in a recession, and higher rates will likely deter auto loans, mortgages, new bond issuances, and IPOs.
Detailed explanation-4: -The primary driver of commercial bank failures during the Great Recession was exposure to the real estate sector, not aggregate funding strains. The main “toxic” exposure was credit to non-household real estate borrowers, not traditional home mortgages or agency-issued MBS.