lets us discuss below Market Failure

Market failures can pose devastating outcomes in the national and global economies. The crash of the U.S. housing market in 2008 is seen as one of the most significant market failures. According to Landler (2008), the crisis that began in the U.S. spread across the global community, significantly affecting global economic outcomes in various sectors. The issue started after U.S. banks took advantage of a loophole in the national policy system and gave loans to members of the public without effectively ascertaining the creditworthiness of the individuals and sold the elements as mortgage-supported securities to investors. The issue led to high rates of default, where a significant portion of the borrowers failed to repay their mortgages leading to substantial losses for the investors and banks that later filed for bankruptcy. Many people also lost their homes and jobs due to the market failure, underlining the need for government intervention to mitigate the effects of the housing market crash on the national system and restore stability in the market and the general economy.

Baye and Prince (2017) point out that governments often implement diverse ways of intervening and attempting to restore positive market performance outcomes in a crisis. For example, the U.S. government resorted to enacting policies that sought to improve the allocation of resources as a strategy for alleviating the impacts of the crash on the national economy. The U.S. passed the Troubled Asset Relief Program, which provided a channel for the Department of Treasury to inject funds into failing banks and significant businesses (Calomiris, 2015). The government also reduced interest to ease the capacity of loan and mortgage repayments. The policy interventions aim to stabilize the market by relieving the scope of customer debt and providing liquidity in the sector.

I agree that the solution adopted by the U.S. government in addressing the housing market crisis effectively addressed the scope and effects of the housing market failure experienced in 2008. The crisis posed significant threats of crippling the national and international economy if banks and the affected major institutions continued to register negative performance results. The intervention measure of enacting targeted policies that prompted the pumping of funds into banks and the struggling institutions jump-started the entities and the general national economy. The strategy mitigated the effects of the debt crisis experienced by the lenders and restored liquidity in the market. Thus, implementing the intervention measure adopted by the U.S. government in gaining control of the failing market by enacting targeted policies reduced the probability of bankruptcy of the affected investors. The strategy also reduced the risk and scope of unemployment by ensuring that the firms could continue operating despite their losses sustained in investments in the failed market. The reduction of interests also ensured that most individuals could quickly repay their mortgages, providing a channel for the housing market and the national economy to regain stability. Thus, using policies to reallocate resources to mitigate market crises is an effective and viable intervention measure.

Critical Thinking Question

What would be the scope of the results had the U.S. government failed to intervene and enact targeted policies that sought to mitigate the effects of the housing market crash witnessed in the nation and the general global community in 2008?

References

Baye, M. & Prince, J. (2017). Managerial economics and business strategy. McGraw-Hill Publishing.

Calomiris, C. W. (2015). An assessment of TARP assistance to financial institutions. Journal of Economic Perspectives, 29(2), 53-80.

Landler, M. (2008). U.S. housing collapse spreads overseas. The New York Times. https://www.nytimes.com/2008/04/13/business/worldbusiness/13iht-housing.1.11931770.html