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The Troubled Asset Relief Program - Term Paper Example
Finance & Accounting
Pages 6 (1506 words)
The Troubled Asset Relief Program, or T.A.R.P., was created in 2008 by the passage of the Emergency Economic Stabilization Act. It was introduced to Congress in the midst of the 2008 financial crisis in the United States, which left large banks on Wall Street either declaring bankruptcy or on the verge of it, while around these banks the financial system of the United States stood unmoving, choked and crippled, brought to its knees and unable to function…
The Need for Relief: Why T.A.R.P. was Created The housing market is generally cited as one of the biggest factors behind the financial crisis that resulted in the need for T.A.R.P. to be created. After a short recession in 2001, housing sales rose, peaking in September of 2005 before dropping by as much as 52% by November 2007 (DiMartino, and Duca 1). In 2001, to counteract a recession, the Federal Reserve proceeded by lowering the interest rate alongside the push from both the Clinton and the Bush administrations for the American public to buy houses (Gjerstad, and Vernon L. Smith). This resulted in the lowering of credit standards, which in turn granted a flood of events such as subprime mortgages, or the lending of money to people generally considered a credit risk, going from 9% in 2001 to 40% in 2006 (DiMartino, and Duca 2). By 2007, the housing market was deteriorating, and delinquency rates on subprime mortgages and the interest-only adjustable rate mortgages were soaring; the big businesses with investors in those subprime mortgages were going under quickly (DiMartino, and Duca 5). The Federal Reserve responded by cutting the interest rate aggressively, from 5.25% to 2%, but the crisis continued (Bernanke). ...
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