Impacts of the recent mortgage crisis on the money supply in the Research Paper

Impacts of the recent mortgage crisis on the money supply in the United States and the actions of Federal Reserve take in response to the mortgage crisis - Research Paper Example One of the major reasons of the recent financial crisis in United Sates was the mortgage crisis. Mortgage crisis refers to a situation in which the money borrowers fail to repay the money they lent from financial institutions. American financial institutions miscalculated that American economy is strong enough to overcome any kind of crisis situation and it is not necessary to bother much about the repaying capacities of the people who approach them for loans and other financial aids. Greedy public exploited the opportunities very well and they approached American banks for financial aids to purchase lavish apartments, real estate properties, vehicles etc. American banks imposed no restrictions in mortgage sanctioning and dispersed huge amount of money for maximising their profits. In most of the other countries, mortgages are sanctioned only after the assessment of the financial abilities of the customer. But in America, banks have shown fewer interests in assessing the abilities of the customers. The unexpected mortgage crisis impacted heavily on the money supply in America and Federal Reserve forced to take strong measures to counter the mortgage crisis. Impacts of the recent mortgage crisis on the money supply in the United States The major impact of the recent mortgage crisis on money supply in America was the change in behaviours of the investors.... driven some analysts to argue that should the monetary policy response fail to restore confidence among investors, the outcome would be the worst crisis seen since the Great Depression† (The United States Subprime Mortgage Crisis And Its Implications For The Caribbean, 2008, p.1). Real estate sector was the worst affected industry as a result of the recent mortgage crisis and subsequent money supply problems. Majority of the real estate business groups rely heavily on mortgages from financial institutions for the completion of their projects. As a result of the reluctance of the investors in investing in banks, Banks started to find money shortages to assist the real estate sector. Banks started to impose strict norms for sanctioning mortgages to real estate people. Moreover, people who approached banks for financial aids for purchasing properties were told that no more mortgages were possible without adequate proof about their financial abilities. Thus, both the real estate bu siness groups and the people who liked to purchase some properties suffered heavily and as a result of that real estate business started collapse. The impacts of mortgage crisis have not been limited to the financial sector alone. In fact, it has spilled into the real economy also and as result of that American economic growth has been reduced considerably over the last four years period. Economic activities in America have been reduced considerably because of the shortage of money in the hands of the public. Moreover, Americans started realise the importance of saving money for future crisis situations as they learned a lesson from the recent crisis. Thus, Americans started to cut down their lavish spending habits because of the mortgage crisis and subsequent recession problems. According to