Aaron Jevon Dy

3 BS Management Engineering
Econ Long Test 3 Essays
Number 1
The 2008-2009 Global Financial Crisis followed the Anatomy of a Crisis. The first step,
which is the asset-price booms and busts was exhibited with the residential real estate. This stage is
when periods of optimism leads to large increases in asset prices, which will land the market into a
speculative bubble, and eventually it bursts causing a major decline in asset price. This happened with
the residential real estate a few years before 2008. Interest rates were lowered so it was cheaper to get
a mortgage and a home. The lending policy at that time was also very lax and so almost anyone can
get a mortgage, then there was a housing boom. Buyers would buy in hopes that the prices of houses
kept rising. Countrywide Financial even issued nearly 100 billion in mortgage loans and some of
these were to risky borrowers who would later not be able to pay it back. Eventually the bubble did
burst and this lead to a decrease in housing prices by 30% from 2006 to 2009 (Ferguson).
This leads to the next step, which is the insolvencies at financial institutions. After the
decrease of housing price, many borrowers were unable to pay back their loans. This created a
problem because even the lenders thought that the prices would continue to increase and so repayment
is sure. Since many borrowers were unable to pay back their loans, the banks would then try to
foreclose the houses but would only be able to recover some of the loan payment because of the
decrease in value. Since there was an increase in houses for sale, this further reduced the price of
houses and so lowered the value. Several institutions were pushed to bankruptcy like Lehman brothers
and Bear Sterns.
Next is the falling confidence. Confidence fell as several institutions became bankrupt. These
institutions were very large and were connected to other institutions as the system worked
interdependently. Therefore, people loss confidence in the financial institutions, which was further
heightened due to the lack of transparency within these firms. People were not aware of how affected
these firms were and so they were afraid.
The fourth element is the credit crunch. Because of the earlier incident with the residential
real estate, banks were now stricter with their lending policy. This included an increase in down
payments, which was previously very low and a more complex screening process. Since banks were
facing problems with insolvency, they did not just tighten the loans for housing but for other
investment projects. Even if one had a profitable investment project, he would have trouble getting a
loan. It was also more difficult to get a credit card or even a car loan.
Following this is a recession. The recession is caused by the lessened consumption as
consumers are not able to spend on what they want because it is harder to get money and also the
lessened investments as firms found it hard to borrow money for new projects. This caused a fall in
national income and an increase in unemployment, which was more than 10% (Mankiw). It was a
slow recovery as many firms still continued to face problems and so unemployment declined only by
a small amount.
Lastly, there is the vicious circle. The stock market started to decline and many firms and
individuals go bankrupt and therefore have to default on their loans. Firms like General Motors and
Chrysler were faced with bankruptcy. This leads back to asset-price busts and financial insolvencies,
which then leads to the next step and goes into a cycle.
Number 2
The liquidity trap is also known as the zero lower bound. If interest rates are almost zero then
monetary policy is no longer effective. Nominal interest rates should always be greater than 0 because

no one would lend money if they had to pay when they lend. During the crisis, the Federal Reserve
lowered the federal funds rate to near 0. Since then, it has kept it low. The Fed also kept accumulating
large amounts of cash. By 2011, there was 1.6 trillion dollars on the Federal Reserves. This is a
problem as it counters the expansionary monetary policy of the Feds in response to the 2008-09 crisis
(Pollin, 2012). The liquidity trap hinders conventional monetary policy. Obama and Bush both signed
into law stimulus packages, which aimed to increase money. The Fed also engaged in two rounds of
quantitative easing. However, the policies and responses to the recession werent as effective (Pollin,
2012). This is because as money supply rises, money is more liquid, but since interest rates cannot fall
any further then these policies are ineffective. This can be mainly attributed to the liquidity trap as
interest rates are near 0 already, and so these policies do not change much.
Works Cited
Pollin, R. (2012, June). The Great US Liquidity Trap of 2009-11: Are We Stuck Pushing on Strings.
Political Economy Research Institute .
Number 3
The article mentions several impacts of the crisis on the Philippines. There was a huge effect
on world trade and exports and imports throughout the world because of the crisis. Philippines wasnt
spared and its GDP slowed down during the crisis. The GDP growth from 7.1 percent in 2007
decelerated to 3.8 percent in 2008 (Yap et al.). However, this decrease is mainly attributed to the
effect of the rising inflation in the Philippines and not by the effects of other countries. This rising
inflation also caused a decrease in consumption and investment
The financial sector wasnt as affected because of the policies that were made following the
1997 crisis. Unlike in the US which had a lot of subprime borrowers, the East Asia banks focused
more on consumer lending and had stricter policy so non-performing loans had a smaller percentage
to total loans.
Unemployment also increased. This can be attributed to a reluctance to higher more people. In
the manufacturing sector there was a large increase in the separation rate. This is most likely due to
the fact that the manufacturing sector was the most negatively affected by the crisis through the
decline in the export channel. On the other hand, there was also a slowdown in OFW remittances.
There was only a 3.8 growth in the first half of 2009 compared to the large 18.2 of the same period in
2008 (Yap et al.). Because of this, foreign exchange reserves still continued to grow despite the crisis.
To cope with the crisis, several people lessened their consumption. Close to 22 percent
reduced their spending and saved money (Yap et al.). They also took measures to save more like
lessening their spending in terms of education (shifting to cheaper schools) and health (shifting to
self-medication). Fiscal deficit then became a problem as the government needed to offset the
decrease in consumption, investment and exports. The government did this by increasing government
purchases, which was financed by debts.
There were also social impacts, which reflected in the problem of attaining the Millennium
Development Goals (MDG). Due to the fiscal deficit, resources were more focused on government
purchases and ensuring the safety of the economy that the efforts to achieve the MDG were financed
less. Based on page 11 of the article, crisis will impact poverty incidence due to its negative impact
on economic growth.
The government responded with the Economic Resiliency Plan (ERP). The goal of the ERP,
state on page 19 of the article, is to stimulate the economy through a mix of government spending,
tax cuts, and public-private partnership programs. Output had moderate success as infrastructure

grew. However, we had to borrow some money as state earlier and this would affect us in the long
run.
In response to the social impacts, the ERP also had some social protection programs with it.
The budget allocation for Social Security, Welfare and Employment increased from 2007 to 2009.
Some of these programs include Conditional Cash Transfers (CCTs) program for the poorest of the
poor, PhilHealth Indigent Program, Training for Work Scholarship Program, and Department of
Health (DOH) program for primary and secondary hospitals (Yap et al.). These programs aim to aid in
alleviating poverty by addressing different issues like housing, food, employment and many others.
However, there were some problems because of the low coverage of these programs. Some overlap
and so lessens the overall impact of these programs. This can be attributed to poor communication
between implementers.
However, these policies still would need to prove themselves in the long run as fiscal deficits
would make it difficult to continue. These are alarming conditions and the government has tried to
respond with moderate success in the short run.