Question

A. What are the major root causes of the recent subprime financial crisis?

B. What are the major policy responses to the financial crisis by Federal Reserve, the Treasury, and regulatory agencies?

From Macroeconomics - case study

Answer 1

Major root causes were:-

1) EXCESS LEVERAGE-it is the root cause for all bank crisis

2) LIQUIDITY MISMATCH

3) TAXES and SUBSIDIES - the rate of tax, that time were discouraging for long term investment.

4) bad governance

5) conflicts of interests.

B. 1) approval of currency swap agreements with several foreign central banks.

2) expansion of traditional tool of open market operations to support the credit market.

3) operation of discount window to give short term loans.