The simple questions that arise as the U.S. government steps to the center of the financial crisis, devising plans to take ownership of hundreds of billions of dollars' worth of bad mortgages are as follows: Will this government intervention known as the “U.S. bailout” restore order in our financial markets? Additionally, what will this grand rescue cost taxpayers? I think that the bailout will work in the U.S. If the plan works, it will attack the central cause of American economic distress: the continued plunge in housing prices. If banks resumed lending more liberally, mortgages would become more readily available. That would give more people the wherewithal to buy homes, lifting housing prices or at least preventing them from falling further. This would prevent more mortgage-linked investments from going bad, further easing the strain on banks. As a result, the current downward spiral would end and start heading up.
However, the case study, “the U.S. Sub-Prime Financial Crisis So Different” suggests that the run up in U.S. equity and housing prices was clearly not a period of boom but it was the justification of financial innovation that caused the sub-prime mortgage crisis. As a result, there was an increase in U.S. productivity due to a flexible U.S. economy, capital inflows and technological progress that enhanced the stability of our economy.
Financial innovation did not let the market make its mark but created loopholes in the financial sector. We all know the saying “what goes up, must come down” and that happened when the periods of increase in the housing prices was followed by a period of drastic decline. Now that the housing prices are falling, this has led to higher default risks and rates and has affected ...