International Business - Essay Example

Although many people understand the consequences of the global recession, not all of these people are aware of how the recession started and what the concerned government entities are doing to try to stop the recession fro deepening. The article “The Crisis and the Policy Response” written by Federal Reserve Chief Ben S. Bernake is something that people should read in these times of economic stress. This article gives the reader a clear picture of what brought about the longest recession since the Great Depression and what are the important mechanisms deployed by the Federal Reserve of the United States to help ease the economic stress.

According to the article written by Mr. Bernake, “The proximate cause of the crisis was the turn of the housing cycle in the United States and the associated rise in delinquencies on subprime mortgages, which imposed substantial losses on many financial institutions and shook investor confidence in credit markets.” Accordingly, the crash in the subprime housing market triggered a chain of events that affected the different market sectors. The impact of the sublime market crash was amplified by the fact that during the credit boom, widespread decline in the underwriting standards happened.

Many banks and financial institutions were too confident about the health of the economy that they loosened up their credit policies. Too much reliance on “complex and opaque credit instruments” by the different financing industry is partly to blame for the economic crisis. According to Mr. Bernake, these credit instruments are fragile and volatile that too much reliance of these types of instruments could prove to be catastrophic. Given the complexity of the market, Mr. Bernake suggested that it is not a sound economic policy to let the market determine its own course alone.

There needs to be some interventions from government agencies to help the market correct itself. The