The Review of the US Macroeconomic Policy - Research Paper Example

Running head: U.S economic policy and its effects 2006-2008. The Review of U.S Macroeconomic policy 2006-2008 s Abstract U.S economy had performed well during the last decade of 19th century and in the first five years of this millennium but the US economy did experience a shallow recession in 2001. But, since 2003, economy was in full recovery. The asset bubble of the late 1990s was one of the largest in history. Rather than allow this bubble to fully unwind, the Fed created more asset bubbles, especially in housing, leveraged finance, private equity and asset-backed securities from 2006 till now. In 2007, the American economy began to slow significantly, mostly because of a real-estate slump and related financial problems, there were predictions that margin squeeze from high energy prices or a dollar shock could be crucial factors tipping US growing economy into a downturn. Introduction: With the global political situation ever changing, foreign policies fluctuation in split second, the economy has suffered too over the recent years. This paper describes the United States of America’s macroeconomic polices in the recent years and their impact on the people. We shall consider the past three years and look at how the changing economic policies changed business interests and how they impact the overall economic situation of the state. The U.S Economy and Policies in 2006 In 2006 U.S economy was still suffering from the effects that the hurricanes such as Katrina had on the U.S. economy and because of their reverberations in 2006. The health of the national economy was facing threat, due to the severe beating that the infrastructure took—most notably the infrastructure for energy. For the preceding year and a half, energy prices had surged worldwide. When the storms hit at the end of August, economic activity had been quite robust for several years, supported by monetary accommodation and strong productivity growth. Real GDP had grown steadily at, or above, its potential or long-run sustainable pace, which is estimated at around three and a quarter percent. This pattern continued even during the third quarter—immediately following the hurricanes—when real GDP grew by just over four percent. In the fourth quarter, growth did drop sharply to about 1 ½ percent. However, a good deal of this slowdown appears to have been due to several temporary factors, none of which were related to the hurricanes. In 2006 the US economy was facing a great deal of un-certainty; the economy appears to be approaching a highly desirable glide path. First, real GDP growth currently appears to be quite strong, but there was good reason for it to slow to around its potential rate as the year progresses. Second, it appears that US economy operating in the vicinity of “full employment” with a variety of indicators giving only moderately different signals. The Fed raised the federal funds rate by 25 basis points a total increase of 350 basis points. However, once the rate got to 4 percent, the issue of exactly how much accommodation actually remained in the economy became more of a judgment call. As a result, some further policy firming was needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. The U.S. Economy and Policies in 2007 In 2007 the data showed payroll employment growing at a rather robust pace for all of last year. Moreover, the unemployment rate had declined by half a percentage point over the past year; this suggests a degree of tightness in the labor market, The decline started toward the end of 2005 and residential investment has fallen—in absolute terms—by a total of 13 percent. This sector alone which represents only a small fraction of U.S. real GDP—subtracted a hefty 1¼ percentage points from real GDP growth. Housing starts have followed a similar pattern, reaching a climax in January 2006 and then falling by roughly 40 percent through January of 2007. In addition to housing, weakness in auto production had slowed the economy in 2007. The auto industry had felt the effects of high oil prices and people’s growing demand for more fuel-efficient vehicles. That had been good news for some of the foreign automakers, but not such good news for U.S. automakers, for which SUVs and trucks have been a key source of strength. As the demand for these vehicles dropped, producers found themselves holding untenably high inventories. Its little wonder that they slashed production. These production cuts slowed overall real GDP growth in the U.S. The U.S. trade deficit totaled $57.8 billion for October 2007. The U.S. government also revised September’s trade deficit to $57.1 billion, the overall U.S. trade deficit is down 8.25 percent in 2007 compared to last. The U.S. trade deficit was approximately $696 billion in 2007 (BEA, 2008). The U.S. trade deficit with China in goods, however, jumped to $25.928 billion in October 2007, up 6.3 percent from the $24.397 billion deficit for October 2006. Financial market impacts, 2007 IN 2007, HSBC, the worlds largest (2008) bank, wrote down its holdings of sub-prime -related MBS by $10.5 billion, the first major sub-prime related loss to be reported. During 2007, at least 100 mortgage companies either shut down, suspended operations or were sold. During 2007, the crisis caused panic in financial markets and encouraged investors to take their money out of risky mortgage bonds and shaky equities and put it into commodities as "stores of value". Financial speculation in commodity futures following the collapse of the financial derivatives markets has contributed to the food price crisis and oil price increases due to a "commodities super-cycle." Financial speculators seeking quick returns have removed trillions of dollars from equities and mortgage bonds, some of which has been invested into food and raw materials. Approximately 80% of U.S. mortgages issued in recent years to sub-prime borrowers were adjustable-rate mortgages. When U.S. house prices began to decline in 2006-07, refinancing became more difficult and as adjustable-rate mortgages began to reset at higher rates, mortgage delinquencies soared. Securities backed with sub-prime mortgages, widely held by financial firms, lost most of their value. The result has been a large decline in the capital of many banks and USA government sponsored enterprises, tightening credit around the world. The U.S. Economy and Policies in 2008 Despite solid growth in the last couple of years, Americas economy subdued through 2008, Moderate job gains, rising interest rates and the continuing slump in housing starts and vehicle sales accounted for somewhat restrained economy over the next two years. The economy expanded in 2007 and 2008, but at a pace well below the 3.2 percent increase in real GDP growth of year 2006. "The expansion of the past couple of years had been accompanied by healthy job gains that had brought the unemployment rate down to an expected average of 4.6 percent. Though job gains shrunk from their 2006 pace." The employment growth of 1.5 million jobs in 2007 and 1.2 million jobs in 2008, down from this years 1.9 million job gains and of year 2005 2 million. The all-items Consumer Price Index moved down from 3.3 percent in 2006 to 2 percent in 2007, before creeping up to 2.4 percent the year after. The U.S. Producer Price Index (PPI) and Consumer Price Index (CPI) both fell in 2008. Those declines – combined with sharp downward spirals in worldwide stock and commodity prices. Output and employment dropped sharply, as was the stock market. The excess liquidity created through the various bailouts – such the Treasury Department’s $700 billion Troubled Assets Relief Program (TARP), which fueled bank takeovers, and not expansionary lending, and the followed-on $800 billion credit-market stimulus combined with the huge federal budget deficit helped to spur inflation. Sub prime mortgage crisis is an ongoing financial crisis triggered by a dramatic rise in mortgage delinquencies and foreclosures in the United States, with major adverse consequences for banks and financial markets around the globe. The crisis, which has its roots in the closing years of the 20th century, became apparent in the end of 2006 and beginning of 2007 and had exposed pervasive weaknesses in financial industry regulation and the global financial system. Financial market impacts, 2008: When Lehman Brothers and other important financial institutions of USA failed in September 2008, the crisis hit a key point. During a two day period in September 2008, $150 billion were withdrawn from USA money funds. The average two day outflow had been $5 billion. In effect, the money market was subject to a bank run. The money market had been a key source of credit for banks and non-financial firms (commercial paper). This credit freeze brought the global financial system to the brink of collapse. The response of the USA Federal Reserve was immediate and dramatic. During the last quarter of 2008, the central bank purchased dollars worth billions of government debt and troubled private assets from banks. This was the largest liquidity injection into the credit market, and the largest monetary policy action, in world history. The governments of European nations and the USA also raised the capital of their national banking systems by $1.5 trillion, by purchasing newly issued preferred stock in their major banks. In 2008, President Bush signed into law a $168 billion economic stimulus package. However, this rebate coincided with an unexpected jump in gasoline and food prices. This coincidence led some to wonder whether the stimulus package would have the intended effect, or whether consumers would simply spend their rebates to cover higher food and fuel prices. Unemployment Rate: As the graphs depicts, the unemployment during the initial months of 2006 and 2007 was almost constant and stable, however with the beginning of year 2008 it gradually increased, an apropos of past economic crisis. The gradual change created a significant standard deviation. Consumer Price Index: The consumer price index too shot to new heights during the year 2008. Comparing that of January 2006 with January 2008, it evidently shows an increase of almost 11points. Taken from: http://stats.bls.gov/eag/eag.us.htm CONCLUSION: This downside scenario was not predestined. Unfortunately, crucial policy errors by the U.S. Federal Reserve all along the way had led us to a ‘point of no return.’ The worldwide economy, now supported in the main only by the overextended U.S. consumer, finds itself at halt speed. The previous three years have been a trial and error situation for the U.S economic policies, with no policy lasting for success. It seems as if the policies were initially successful, however over the passage of time it was proved that most of them only proved to be bubbles, which burst as soon as a crisis hit the nation. References Bureau of Economic Analysis, “overview of the U.S Economy” www.bea.gov/newsreleases/glance.htm www.census.gov/econ/overview The American economic review, www.ingentaconnect.com/content/aea/aer U.S bureau of Labor statistics www.bls.gov Paul Craig Roberts Outsourcing the American economy, April 19 2005 www.counterpunch.org/roberts041192005.html www.shvoong.com/books/1672416-subprime-crises-economy-needs-correction Read More