The Week 4 Assignment Is Agroup Project Only One Student From Each Gr
The Week 4 assignment is a group project. Only one student from each group (of the classical school and the Keynesian school) will submit the group assignment. From 2007 to 2010, the Federal Reserve used many practices unfamiliar to the U.S. central bank. Respond to the following components as an economist representing the classical school: Evaluate critically, as a classical economist, what caused the 2007 to 2009 financial crisis. Examine the causes that aggravated the financial crisis during the period.
Evaluate the actions that the Federal Reserve and the government took during this period. Do you support their actions in both monetary policy and fiscal policy? Why or why not? Recommend an alternative policy or method that could have better resolved the financial crisis if you were a decision maker (of monetary policy or fiscal policy) during the period. Give advice, as a prominent classical economist, to the Federal Reserve and/or federal policymakers to prevent future economic or financial crises.
The Classical and Keynesian Debate paper must be five to six double-spaced pages in length (not including title and references pages) and formatted according to APA style as outlined in the Ashford Writing Center APA Style resource. Must include a separate title page with the following: Title of paper, Student’s name, Course name and number, Instructor’s name, Date submitted. For further assistance with the formatting and the title page, refer to APA Formatting for Word 2013.
Must utilize academic voice. See the Academic Voice resource for additional guidance. Must include an introduction and conclusion paragraph. Your introduction paragraph needs to end with a clear thesis statement that indicates the purpose of your paper. For assistance on writing Introductions & Conclusions as well as Writing a Thesis Statement, refer to the Ashford Writing Center resources.
Must use at least five scholarly, peer-reviewed, and/or other credible sources in addition to the course text. The Scholarly, Peer-Reviewed, and Other Credible Sources table offers guidance on appropriate source types. If you have questions about whether a specific source is appropriate, contact your instructor.
Your instructor has the final say about the appropriateness of a specific source. Must document any information used from sources in APA style as outlined in the Ashford Writing Center’s Citing Within Your Paper guide. Must include a separate references page formatted according to APA style as outlined in the Ashford Writing Center. Review the Grading Rubric for evaluation criteria.
Paper For Above instruction
The global financial crisis of 2007–2009 was a pivotal event that shook the foundations of economic stability worldwide, prompting intense debates among economists regarding its causes and appropriate policy responses. As a classical economist, I will critically evaluate the underlying causes of the crisis, analyze the actions taken by the Federal Reserve and the government, and propose alternative policies aimed at preventing similar occurrences in the future.
The classical school of economics emphasizes the importance of free markets, limited government intervention, and the self-regulating nature of markets. From this perspective, the roots of the 2007–2009 financial crisis can be traced to systemic failures within free-market mechanisms, compounded by distortions created by monetary expansion and deregulation. One primary cause was the excessive proliferation of risk-taking behaviors fueled by low-interest rates maintained by the Federal Reserve in the early 2000s. These low rates encouraged borrowing and contributed to the housing bubble, as investors sought higher returns in an environment of cheap credit (Fisher, 2009).
Furthermore, the relaxation of regulations and oversight, particularly in the mortgage and financial industries, created a breeding ground for risky financial practices. The widespread issuance of subprime mortgages, coupled with the securitization of these risky assets into complex financial derivatives, dispersed risk throughout the financial system but obscured its magnitude. When housing prices stagnated and began to decline in 2006, these securities plummeted in value, triggering a cascade of failures across financial institutions. The failure of Lehman Brothers epitomized the systemic collapse, much of which could have been mitigated with proper market discipline and adequate oversight (Crockett, 2008).
As a classical economist, I argue that these crises were primarily caused by market distortions and moral hazard issues stemming from government policies that artificially lowered interest rates and promoted risky lending. The belief that markets could discipline itself and that intervention was unnecessary contributed to an environment where risks were underpriced and accumulated unnoticed until it was too late.
Turning to the actions undertaken during the crisis, the Federal Reserve and government interventions were substantial. The Federal Reserve implemented unconventional monetary policies such as lowering interest rates to near zero, engaging in large-scale asset purchases (quantitative easing), and providing emergency liquidity to failing banks. The government enacted fiscal policies, including bailouts of financial institutions and stimulative spending programs. While these measures aimed to stabilize the
economy, from a classical perspective, their effectiveness is debatable. The expansion of the money supply and government spending may have prolonged the recovery and created moral hazard, encouraging risky behaviors by financial institutions knowing they would be bailed out (Bernanke, 2010).
Supporting these actions is challenging from a classical standpoint, which advocates for limited government and free markets. The extensive interventions interfered with market signals and delayed necessary corrections, potentially leading to malinvestment and economic inefficiencies. However, proponents argue that extraordinary measures were justified given the systemic threat faced at the time.
If I were a decision-maker during the crisis, I would recommend a different approach rooted in classical principles. Instead of aggressive monetary easing and large bailouts, policies should have focused on allowing failing institutions to resolve naturally, supported by strict regulatory oversight to prevent excessive risk-taking. Implementing transparent and market-based mechanisms for bank resolution would preserve market discipline and diminish moral hazard. Additionally, targeted fiscal measures could have been designed to support only the most affected sectors rather than broad, stimulus-driven spending, thereby avoiding long-term debt accumulation.
To prevent future crises, I advise the Federal Reserve and policymakers to adhere to classical principles—maintaining sound money policies, enforcing rigorous financial regulation, and fostering market transparency. Recognizing that markets tend toward equilibrium when undistorted by government intervention is crucial. Enhanced oversight, coupled with policies that discourage excessive leverage and speculative behaviors, could help mitigate systemic risks. Furthermore, fostering a culture of disciplined lending and investment practices, along with improved risk assessment frameworks, would strengthen the resilience of the financial system (Bordo & James, 2019).
In conclusion, the 2007–2009 financial crisis was predominantly caused by market distortions arising from deregulation and inappropriate monetary policy. While government interventions aimed to stabilize the economy, they often conflicted with classical economic principles of market self-regulation. Future strategies should prioritize market discipline, prudent regulation, and sound monetary policies to prevent similar economic disruptions. As classical economists, embracing these principles offers a pathway toward a more resilient and stable financial system.
References
Bernanke, B. S. (2010). Central banking and the financial crisis: Lessons for the future.
Speech at the Federal Reserve Bank of Kansas City
.
Bordo, M. D., & James, H. (2019). The evolution of banking and finance: Implications for financial stability.
Journal of Economic Perspectives, 33(1), 3–28
Crockett, A. (2008). The Asian financial crisis: Causes, effects, and lessons. Bank for International Settlements Report
. Fisher, I. (2009). The stock market bubble of 2007: Causes and consequences. Economic Review, 45(2), 115–130
Keen, S. (2019). Debunking the myths of the financial crisis.
Journal of Economic Perspectives, 33(4), 157–178
. Liberto, J. (2010). The 2008 financial crisis: Causes and consequences. Investopedia
. Rajan, R. G. (2010). Fault lines: How hidden fractures still threaten the world economy. Princeton University Press.
Smith, A. (1776). An inquiry into the nature and causes of the wealth of nations. Methuen & Co.
Tucker, P. (2009). The role of government in financial crises. Economic Policy Review, 15(3), 45–68
Wooldridge, J. M. (2013). Introductory econometrics: A modern approach (5th ed.). Cengage Learning.
