Before a financial crisis wreaks havoc on an economy, there are chances that indications of its occurring can be witnessed early. Early measures to curb the situation can be employed. For the one that occurred in 2008, its indications started affecting the housing sector as early as 2006 with decreased housing prices that were misinterpreted by Realtors and Banks. Banks made it worse by making harmful investments that led to more regression of the economy.
The government has its role to play in controlling the situation. It can limit or introduce Bank Acts meant to control the situation through banks unlike the Community Reinvestment Act and Gramm-Rudmann Act.
The government, also through banks, can limit the lending rates to individuals, investors and also Inter banks. Panic in banks created in the market changes led to loss of value to mortgages which affected banks directly because they were the mortgages’ custodians. Banks, on realizing that they might end up absorbing the losses, could not trust each other when lending to each other through exchange of such mortgages to serve collateral which resulted in increased borrowing rates between banks. The distrust further worsened the Financial Crisis of 2008.
Become more vigilant
The Federal Reserve can also remain vigil to deteriorating financial situations and add liquidity banking systems in times when such events occur. It can also bail out banks and Insurance companies that are worst hit to bring them back to their feet as intervened for JP Morgan Chase and AIG.
The Treasury Department also improved the situation by subsidizing and taking over Freddie Mac and Fannie Mae.
A run on ultra-safe money market funds by companies further aided the situation whereby all profits they accrued in a day were banked and this crated some finances for the banks to issue short-term loans thus earning banks interests.
Don’t move Money to Treasury Bonds
A move by businesses move money from their accounts to Treasury Bonds which are much safer further aided the financial crisis.
The blocking of the Treasury Bill by the Republicans to bail out banks with $700 billion dollars that would have reassured the safety of businesses’ money accounts almost led to the collapse of the global stock market. Half of it was used and banks were able to pay back by 2010. The other half was used by the president to launch a package that directly put the cash into the economy instead of banks.