Over the past decade, governments globally have grappled with the enduring reverberations of the 2008 Great Recession. Politicians, particularly in the United States, suggested the execution of sound economic policies as the most effective response to this emerging challenge. Policymakers backed this proposition since tweaking government budget, revising terms of national ownership and taxation had been successful in the past when addressing the Great Depression. It was also crucial to respond promptly since the Great Recession had resulted in a steep economic decline evident in world markets. This paper, therefore, evaluates the United States’ response to this crisis and the impact of economic policies implemented on the market
Major Problems of the “Great Recession“
The Great Recession began in early 2007, marking the beginning of tough economic times for the world market. The extreme of reduction in the amount of liquidity within the global financial market had particularly negative effects on the real-estate sector. Consecutive reductions in the prime rate observed from 2000 prompted banks to lower interest rates, which made it possible for thousands of customers to receive mortgage loans. However, the prime rates soon recorded an unexpected ascent which resulted in steep fall in home prices. Home owners were soon “underwater”, inadvertently owing more than they were worth. Banks also proceeded to participate in an interbank freeze which made it difficult for individuals and businesses to obtain credit to emerge out of their financial rut. The operational capacity of major companies was also affected since they were forced to reduce outflow and investments. As a result, permanent layoffs became the norm and soon left an estimated 8.8 million Americans unemployed (Center on Budgets and Policy Priorities, 2019).
The banking sector also came to grips with the reality facing a majority of leading financial institutions, leaving many with no other option but to apply for federal bailouts. Major automotive companies such as Chrysler eventually declared bankruptcy and had to agree to unfavorable bail-out terms forcing it to cede partial ownership to the government. Furthermore, a 2.5 percent increase in the poverty rate was experienced within the first 3 years and soon followed closely by the loss of wealth through stock prices (Bofinger et al., 2015). Many also took a long time to recover and counteract the adverse effects of this recession, resulting in prolonged economic difficulties for most American households.
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Monetary Policy as a Response to the Great Recession
The Federal Reserve is required by law to implement a fitting monetary policy during periods of economic decline. This seemingly mundane action has been credited in the past with managing high rates of inflation and reducing unemployment. The Federal Reserve set this course of action by setting a temporary interest rate to determine how cheap or expensive financial institutions can provide loans to each other. The presence of this low interest rate resulted in an increase in liquidity which is essential when starting a new business. This then resulted in new employment opportunities for individuals who had lost their jobs since 2007.
The Federal Reserve also implemented quantitative easing which would eventually result in the establishment of a reserve kitty for leading financial institutions to aid the purchase of significant assets. It was through this technique that a substantial amount of finances were injected into the economy to stimulate growth. This monetary policy also placed special emphasis on targeting the 2 percent inflation rate as a significant alternative when seeking to help the economy to recover. The Federal Reserve was primarily targeting a return to price stability and an increase in employment opportunities. Open-market operations entailed the implementation of bilateral currency exchange agreements which would ultimately ensure that funding remains constant. Additionally, pressure was relaxed on long-term interest rates which also created favorable conditions for the purchase of long-term securities.
The Implementation of Fiscal Policy
Financial policy was also applied during the Great Recession by relying on the execution of financial stimulus plans. Policy makers within the United States were quick to suggest the enactment of progressive tax cuts and austerity measures to boost their slumping economy. Most of the suggestions made were developed in reference to the Keynesian theory which suggested that discrepancies in government spending during periods of economic decline can help save resources. The fiscal policy implemented would feature fiscal stimulus plans that targeted 2 percent of its gross domestic product (G.D.P). In 2008, the Economic Stimulus Act of 2008 was signed into law after being forwarded by Congress for approval. Close to $150 billion was injected into the economy and an implementation of tax rebates for a section of the population (Ódor, 2017).
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Taxpayers below the tax rebate were eligible for a rebate, often equal to one’s net income tax liability. The use of direct deposits for refunds often resulted in a stimulus payment which went a long way in transforming the economic condition at the time as envisaged by the American Recovery and Reinvestment Act of 2009. It is also worth noting that the purpose of fiscal policy was to stimulate consumers and businesses to spend more, therefore contributing to economic growth. Legislators also addressed the subprime mortgage crisis by reducing barriers that hindered most mortgages from receiving government insurance.
Goals of Fiscal and Monetary Policies Employed
Fiscal and monetary policies were employed primarily to stabilize the cyclical fluctuations witnesses in the wake of the Great Recession. Fiscal policies in the form of tax rebates and austerity measures served to maintain macroeconomic stability by promoting aggregate demand. Economic activities were also limited to occasions of strong and noticeable growth to manage fluctuations. Thus, economic agents could now make accurate predictions when presenting budgets for approval. Domestic demand would then be stabilized while promoting development within the market (Wessel, 2014, p. 54). On the other hand, monetary policy sought to increase the supply of money while maintaining price stability. The implementations of monetary policy also focused on maintaining a stable rate of inflation which would ultimately promote macroeconomic stability. This also meant that timely strategies were implemented to threats to price-stability.
An Evaluation of the Successes of the Implemented Policies
The implementation of the assortment of policies to manage the Great Recession enjoyed relative success within the United States. Tax rebates elicited the desired effect where stimulus payments motivated households to increase spending, therefore, prompting an upsurge in nondurable consumption. The simple act of maintaining inflation at 2 percent resulted in a cumulative increase in the number of individuals employed by companies with ready access to liquidity. Furthermore, congress implemented the Consume Protection Act and Dodd-Frank Wall Street Reform act to prevent the escalation of the economic decline while supporting quick recovery.
The 2008 Great Recession marked one of the most unexpected economic downturns in contemporary history. It posed numerous risks to the economy which featured a fall in house prices, unemployment, lack of access to loans and bankruptcy. The Unites States Congress responded by enacting the Economic Stimulus Act of 2008 and American Recovery and Reinvestment Act of 2009 as appropriate fiscal and monetary policies. It was through the implementation of these sound economic policies that the United States was able to manage its market and chart a new course.