Financial Crisis and a monetary stimulus by US Federal Reserve Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Financial Crisis and a monetary stimulus by US Federal Reserve Case Study Solution

The Financial Crisis of 2007-2008 was one of the painful disasters for all the economies in the world. It was the indication of the over burden of the sectors as well as the policy makers that were able to achieve the desired economic development. The cause of such crisis was the development of irrelevant or flexible policies by the Federal Reserve that allowed every player to participate in a flexible borrowings of the real estate and other illiquid assets. The impact of the crisis was the inclusion of sub-prime category that was allowed to exercise the securitization of asset-backed and mortgage-backed securities in order to develop their future considerations. However, such a disaster came out from the involvement of speculators in the particular process of securitization. Whose only purpose was to make capital gains and profits, that why the speed up of the transactions led to increasing the interest rates that were not allowed for sub-prime categories to repay the loan. Thus, it was one of the primary reason for such crisis.

So, to overcome the similar crisis shortly, Federal Reserve and the participation of US government made several programs and actions to improve the economy from such damage incurred in the past. Therefore, the most important step US Federal Reserve took was allowing all the banks to borrow the Federal Funds with interest near to 0%. It had made most of the banks to offer low-interest lending criteria for many institutions and the companies. The main reason for such act would be to improve the economic structure by flow out the money supply to maintain the lower interest rates. It would also allow to stabilize and expand the economic growth gradually and not consider any indication for another financial crisis.

Financial Crisis and a monetary stimulus by US Federal Reserve Harvard Case Solution & Analysis

During the financial crisis, the rates of real estate and other illiquid assets increased and not allowing most of the borrowers and purchasers to take the position (Subjected to not able to pay the principle or purchase due to extremely high prices or interests). So, the Federal Reserves conducted a program to launch Term-asset backed securities loan facility (TALF) to reduce the prices of real estate market. Thus, the process involved the purchase of asset-backed and mortgage-backed securities from Fannie Mae and Freddie Mac (The two biggest securitization providers in the recent times) by the Federal Reserve and other regulatory authorities and supplied the securities towards the public in low rates. The stimulation also provided to reduce the mortgage rates and housing prices gradually and performed proper scenario to increase the securitization activity which is the financial innovation of the recent times to maintain and boost the monetary flow. However, the main rules and regulations of TALF were not allowing the sub-prime category or other financially unstable participants to exercise the program because if such scenario would implement, then it is most likely that a similar financial crisis would incur.

These are the primary monetary stimulus actions that government took to improve the economic structure and reduce the probability of another financial crisis. So, it is concluded that if such the activities would tend to flow continuously, then it can be said that it’s hard to predict another crisis. It is now recommended for Federal Reserve to secure the economic structure by introducing the additional policies for middle classes and other low-income people (Like Micro-finance borrowing criteria)to increase the money supply and improve the interest rates that would be applicable for them to consider for long-term. So, such policies should not allow them to default (Fix the covenants suitable for both the parties) and make another indication of a crisis. It is just a general scenario to increase the money flow but not forcing the Federal Reserve to implement it. ...................

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