Effects of the Financial Crisis and Economic Recession|conclusion

The recent financial crisis has had numerous real economic effects mediated by the failure of some of the biggest financial institutions. Such effects on the U.S economy and the government response to the crisis were what formed the purpose of this paper. Both the government policies existing prior to the crisis and imprudent practices by the bailed entities were identified as the main reasons that lead to the widespread effects of the crisis.

Effects of the crises were noted primarily on increasing the cost of external financing. By such an increase; firms that relied on this mode of financing faced a bleak future with credit acquisitions being hard to come by. Such effects had the potential to affect other sectors of the economy by their effect on employment thus the income and consumption level of individuals.

To prevent loss of confidence in the financial system, the government’s immediate response was to structure a bailout plan for some institutions. Secondly the deposit insurance was raised to cater for potential future economic adversity. Though such contribute to the solution they have also been argued to promote moral hazards within the organizations and reluctance to deal with failing entities by regulators ; thus necessitating external regulation of the sector.

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