Examples of bailout in the following topics:
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- Some people question a government's role in financing.When a government directly lends, the government squeezes the financial institutions out of the loan market.Furthermore, the federal government loan guarantees increase the problem of moral hazard.Financial institutions receiving the loan guarantees might not screen borrowers as much, lending to borrowers with a high default risk.For example, the effects of the 2007 Great Recession continue to linger in the U.S. economy, even in 2014.Recession caused mass layoffs and doubled the unemployment rate.Then the housing values continue to plummet while foreclosures continue soaring.Consequently, the U.S. government might be liable for trillions of dollars in loan guarantees and bailout of public corporations.We explain several examples below:
- Fannie Mae and Freddie Mac hold roughly $6 trillion in mortgages, comprising half the mortgages in the United States.The U.S. government had seized these two institutions in 2008, and it has spent billions of dollars to bail them out.Bailout cost will continue to soar if the U.S. economy does not recover.Unfortunately, the U.S. government helped create this mess because it encouraged Fannie Mae and Freddie Mac to grant mortgages to low income households, who become vulnerable to downturns in the economy.
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- Purpose of the bailout was to get the U.S. banking system to start lending again.
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- The financial crisis of 2007–2008 caused the near-total collapse of many large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world.
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- Furthermore, it promised AIG four bailout loans worth a total of $163 billion.