Effects of the Financial Crisis and Economic Recession on the US Financial System

Financial crises have been a characteristic of global economies for many years. Of the many economic recessions the recent financial crisis has been argued only second to the 1930s great depression in its adverse outcomes (Kenc & Dibooglu 2010). Just as the earlier crises the recent crises was also marked by failure of banking institutions and other financial intermediaries thus providing barriers to financial intermediation. With the reluctance in lending by banking institutions following numerous losses from superfluous lending that occurs before the crisis; businesses that had pegged their expansion on this mode of financing could be adversely affected thus stagnating economic growth (Rötheli 2010). The effect of such crises has led to government interventions to reduce the real effects that these would have on the economy.

To control for adverse economic outcomes of financial crisis governments have for used monetary policy strategies to influence expenditure and investment. When monetary policies lead to an increase in bank lending rates – e.g. during periods of excessive spending – the availability and supply of money is curtailed by deterred borrowing due to increased costs of financing. On the other side however low bank rates could promote borrowing where the banks capitalize on these by offering credit facilities to borrowers at lower interest rates – a policy that is associated with recovery from economic depressions. When low bank rates are however are not controlled and allowed to continue unabatedly; imprudent lending practices may result leading to failures in financial intermediaries in the event of a financial crisis (Larson 2007). This paper thus evaluates the outcomes of the recent financial crisis on the financial system of the United States. As such the causes and economic consequences of the crisis, government actions and policies aimed at addressing the situation and the activities of financial intermediaries such as banks and insurance companies will be evaluated.

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