Microeconomic Aspects of the Financial Crisis

AIG received aid from the government (Myer , 13 . This is a question of making a choice based on the outcome that brings in the maximum benefits as suggested in the game theory (Andrean , 95 . The government could not afford to lose AIG because the financial markets were likely to suffer a great deal the effect of Lehman Brother 's collapse was much lesser

The government has come up with lending facilities so that the Federal Reserve can lend to banks and non-bank firms at lower interest rates (Coll et al , 1 . An example

is the Term Asset-Backed Securities Loan Facility (LATF . In this decision , economics of information apply since the government clearly understands that lower interest rates will attract more borrowings leading to increase in money supply in the economy . Consequently , the inflation can be reduced . This is perfect information and Smith (136 ) notes that with such kind of information decisions can be made with ease

The legacy loan and legacy securities programs have been established where the government is purchasing legal securities from financial organizations that qualify (Coll et al , 2 . This is a way of providing debt capital and equity capital to these companies hence helps them in absorbing the effects of the financial crisis . The same idea of increasing money supply is applied although this time round open market operations is applied

Another way in which the government has tried to deal with the crisis is through economic stimulus . The Economic Stimulus Act was signed in 2008 . President Bush approved 168 billion which would act as a stimulus package . The amount was to be covered by tax payers . The American Recovery and Reinvestment Act is another economic stimulus act that was signed in 2009 by President Barrack Obama 800 billion is to be obtained from spending cuts...