75 word response to each student as it pertains to what they wrote about original discussion question, writing homework help

ALL RESPONSES MUST BE ORIGINAL. NO PLAGIARISM

You must respond a minimum of 75 words each to the student 1 and 2 reply to the original discussion.

HERE IS AN EXAMPLE OF HOW YOU RESPOND TO EACH STUDENT

Hello Student 1,

Great post. I agree with you that recession is not caused just by money supply, however, i think money supply is one of the main causes of the economy fluctuation for any nation. It can harm positively or negatively. So do you think demand and supply is one of the main causes of a recession for a nation?. I agree with you that we as consumers are affected by the environment changes and depending on that we decide to spend or not to spend money. However, the need for products is increasing everyday and to obtain what we want we need the money. I think money supply affect the way we spend and how we spend the money.

ORIGINAL DISCUSSION QUESTION

By increasing the money supply, the Federal Reserve can lower interest rates. This has a broad impact on the economy as mortgages, business loans, etc. can be obtained less expensively. Some economists believe that the money supply increases contributed to a housing bubble and the subsequent housing market crisis of 2008-09. They suggest that this event is an example of how the Fed can create recessions by artificially encouraging bad investment decisions, and that the same pattern can be seen in the tech stock bubble of the late 1990s and other recessions even as far back as the Great Depression.

Evaluate this view of the cause of recessions. Do you agree or disagree? Why?

STUDENT 1 RESPONSE TO ORIGINAL DISCUSSION QUESTION

Hello Class,

When we look at a graph of economic growth, contractions, and recessions over time, much like we did in Wednesday night’s class, we see economic or business cycles for the US economy. There are times of economic growth, indicated by peaks, followed by periods of recession and the cycle repeats. A peak is when the economy has “reached a temporary maximum… the economy is near or at full employment and the level of real output is at or very close to the economy’s capacity” (McConnell, Brue, & Flynn, 2015). A recession on the other hand is “a period of decline in total output, income, and employment. This downturn, which lasts 6 months or more, is marked by the widespread contraction of business activity in many sectors of the economy. Along with declines in real GDP, significant increases in unemployment occur” (McConnell, Brue, & Flynn, 2015).

When looking at Professor Terrell’s post on the “different views of recession”, I really focused in on the Austrians portion of that post. Specifically, the portion of that section that talked about the low interest rates that occurred in the US in the 90s and 2000s that supposedly caused the housing bubble to burst in 2007. I totally disagree with this viewpoint. Sure, interest rates in this country were low. But that alone is not the reason that the housing bubble burst. The main reason that caused the housing bubble to burst were the financial devices that were created in the form of mortgage-backed securities (MBS).

Financial advisors at banks were selling homes to all of the excellent and great credit rated individuals and making money on all of those transactions. They were looking for ways to get more individuals in the housing market and came up with the idea of a MBS. They sold houses to people with bad credit, bundled a bunch of those mortgages together, and colluded with the bond rating agencies to get these MBSs AAA ratings (as safe as a US Treasury bond). With that AAA rating, they could then approach insurance agencies like AIG and others to insure these securities and then they sold these securities on the open market to investors around the world. As the advisors ran out of people with less than great credit, they moved to people with bad credit and continued packaging these loans. The folks putting these securities together made a killing. A lot of these mortgages had teaser rates. People bought way more house than they could afford and didn’t pay attention to the terms of the loan. Over time, a lot people with horrible credit, bought homes way outside of their price range. As those teaser rates went away and the interest rates increased on their homes, they were unable to make the payments and the gig was up. Mortgages all over the country started to go into foreclosure as people couldn’t make their payments and the housing bubble started to burst. This affected more than the US as other countries bought a lot of these securities, not to mention in a global economy, economies of countries around the world are intricately tied to the US economy.

So yes, while interest rates were low in the 90s and 2000s, that is not the main reason for the housing bubble burst. It was reckless financial engineering by big banks, insurance agencies, and rating agencies. That is what caused the great recession, in my opinion. It wasn’t the government’s interest rates; it was greed in the private sector.

References

McConnell, C. R., Brue, S. L., & Flynn, S. M. (2015). Economics: Principles, Problems, and Policies (20th Edition). New York, NY: McGraw-Hill Education.

STUDENT 2 RESPONSE TO ORIGINAL QUESTION

Hello everyone,

The increase in the money supply did not cause the recession to occur. Banks and individuals making bad investment decisions was the cause. Banks were encouraged to loan to low income individuals or individuals who had bad credit. Having a lower income does not constitute as a bad investor. The bad credit scores should have indicated how those individuals handled paying their bills. It would not make any sense to loan to those that had bad credit scores. The scores show the inconsistency of those paying on their loans. It did not help that many mortgage companies had some unusual terms in their mortgages that included balloon payments that those with low incomes could not afford, which caused them to walk away from those housing investments (Jenkins, 2012). The housing market crises was just one part of the problem that caused the recession to occur.

Businesses and households curbed their spending and borrowing habits due to pessimism that had spread throughout the financial markets that ultimately affected the economy (McConnell, Brue, & Flynn, 2015). The housing market crises may have contributed to the recession, but ultimately, it was the banks and mortgage companies who made the bad decisions to loan to bad investments that started the housing crises.

References

Jenkins, J. (February 16, 2012). Understanding the Housing Market Crisis. Investment U. Retrieved from: http://www.investmentu.com/article/detail/27497/ho…

McConnell, C. R., Brue, S. L., & Flynn, S. M. (2015). Economics principles, problems, and policies (20^thed.). New York, NY: McGraw-Hill Education.