What has been the impact on money supply in the U.S. of the recent mortgage crisis - Essay Example

What has been the impact on money supply in the U.S. of the recent mortgage crisis Contents Contents Introduction 2 Impact of Mortgage Crisis on Monetary Supply 2 Conclusion 6 Bibliography 7 Introduction In America over the preceding few years, loads of home buyers had procured costly houses with out of the line mortgage products funded by unrelenting mortgage lenders. The current deceleration in housing trade, inferior house costs and the retuning of mortgage variable rates has initiated a downturn in the mortgage sector. The predicaments are principally manifested in the "sub-prime" sector and are imitated in swiftly growing delinquency, non-payment and foreclosure rates. This paper hereby briefly analyzes the impacts of current US mortgage crisis on money supply. Impact of Mortgage Crisis on Monetary Supply It is an undeniable fact that Money Supply has an influential effect on economical commotions. Amplification in money supply inspires improved expenditure as it places added money in the hands of customers making them to feel richer and eventually inspiring them to swell their expenses causing temporary boost in financial activities and controlling deflation. (Handa, 2008) The phase of 2003-2006 witnessed exceptionally near to the ground interest rates along with consumer hopes of increase in double-digit house costs, assisted a record $3.2 trillion in house mortgages being written by lenders, with approximately 20% of this sum contribution towards subprime. The subprime mortgage sector also served supplicants having bad credit history at elevated interest rates. (Handa, 2008) It is now well known that in array to boost their profits, banks issued huge loans to investors engaged in US housing markets, but owing to sudden price decrease in housing sector, the quantity of loan defaulters increased causing liquidity crunch for banking institutions creating an environment of money crunch for the markets based on investor and end-user relations and eventually led the international markets to face mortgage crisis. (Ashdown, 2002) The mortgage crisis led countries to increase the money supply to control the sudden swell in economic inflation and increased interest rates. Faced with the slither in the actual economy and the crisis in the financial system, the Federal Reserve implemented extraordinary moves i.e. a $200 billion loan package was issued to stanch money constrictions. (Axilrod, 2009) In 2008, the majority of US money supply augmented noticeably as the governmental authorities interceded to infuse money into the system. Traditionally, an impulsive boost in the money supply resulted in a raise in interest rates to deflect price increases or inflationary prospects. (Ashdown, 2002) Source: New York fed The US government, up to now had issued huge amount of currency to assist procuring of lethal mortgage-backed securities and other badly performing resources from banks owing to the anticipated risk of price increases and dollar depression. Though, this risk is of a reduced amount of worry to the Fed as compare to the depression and languish growth as in 2008. Owing to the black economical month of March, 2007 in which over 25 subprime lenders declared insolvency, large losses or setting themselves up for sale, several lenders discontinue home equity as well as "stated income" loans. To control the total collapse of mortgage industry in July, 2007 Federal Reserve increased money supply by approximately $100 billion to facilitate retail financial institutions with credits at lower rate following with another $41 billion during late Oct - Nov, 2007 which was the biggest lone increase by the Federal Reserve since Sept 19, 2001 i.e. $50.35 billion. (Barth, 2009) In accordance with the review of literature provided by several economists, it is revealed that Money Supply is not dependable on the quantity of currency printed but it depends on the pace of flow i.e. "how many times it changes hand." (Mishkin, 2008) The trouble is that the rate of circulation had felled quicker than the Fed's ability to raise the fiscal base. As per a analysis by "Dr. Warren Huang" published on Wall Street Journal Market Beat and Real Estate Development blog, it is observed that existing US mortgage crisis in 2009-10 will fall 30 - 50 % dragging US economy into profound recession regardless of Fed fiscal moderation, rate slash, trillion dollar bail out packages, m2 money supply growth have hoisted to approximately 7.7 % with null fed subsidize rate. (Mishkin, 2008) Conclusion The incidents like subprime mortgage crisis have wrecked the liaison between money supply growth and the recital of the US financial system. In array to boost profits in an over competitive banking market, excess loans were issued to the borrowers who had poor credit histories along with people with inadequate income sources resulted in escalated defaulter rates which laid the foundation stone for the formation of credit crunch enforcing banks to declare situation as mortgage crisis. (slund, 2008) The occurrence of mortgage crisis impacted the fed's policy of money supply. There has been a significant increase noted in the growth of money supply in the last two years which was necessary to control the inflation and collapse of mortgage sector. This paper hereby has briefly discussed the impact of mortgage crisis in America on money supply. Bibliography Ashdown, N. H. (2002). The impact of banking policy on trade and global stability. Greenwood Publishing Group. slund, A. (2008). Challenges of globalization: imbalances and growth. Peterson Institute. Axilrod, S. H. (2009). Inside the Fed: Monetary Policy and Its Management, Martin Through Greenspan to Bernanke. MIT Press. Barth, J. (2009). The Rise and Fall of the Us Mortgage and Credit Markets. John Wiley and Sons. Handa, J. (2008). Monetary Economics. Taylor & Francis. Mishkin, F. S. (2008). The Economics of Money, Banking, and Financial Markets. Pearson. Robinson, J. (2009). 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