The Current Global Financial Crisis - Coursework Example

Current Economic Crisis Introduction America is going through a bad patch along with most of the other countries because of the current global financial crisis. The crazy lending habits of the banks without assessing the financial capabilities of the loan seekers, the changing life styles of the American public (spending all the money which they earn rather than saving) have contributed heavily to the current financial crisis. ‘The reasons for current financial crisis in America can be attributed to many things like, The Federal Reserve, is making credit cheap, Home buyers, who took advantage of easy credit contributed to bid up the prices of homes excessively. Congress, which continues to support a mortgage tax deduction that gives consumers a tax incentive to buy more expensive houses. Real estate agents, most of whom work for the sellers rather than the buyers and who earned higher commissions from selling more expensive homes etc’ (Bianco) The crisis is so deep that only the economic reform policies alone may not bring the desired results. Many economists believe that the current recession may continue longer than anticipated. President Obama has taken lot of measures (Obama program) to counter the current crisis which has been brought mixed reaction from the economic experts. This paper evaluates the criticism raised by CATO Institute, Paul Krugman and Joseph Stiglitz and the support extended by Lawrence Summers to the Obama program. The nature of the current economic difficulties we are in The American people’s changing life styles are one of the biggest factors for the current crisis. The greedy customers accepted the offers (loans) from the financial institutions with both hands. They have approached the banks for everything and the banks were ready to help them without even assessing their backgrounds or financial capabilities. The financial institutions miscalculated that the global economy will never exhaust and whatever the goods and services sold in the market will bring profit. Such irresponsible allocation of resources in the market was the main cause of the current problem. The banks have given more focus to the goods or services sold rather than the goods or services bought. In other words, they were more interested in selling of their services. They never thought too much about the returns against the services they provided. Once the balance between the services and goods sold and bought were destroyed, financial crisis came into exist. The banks’ decisions and behaviors with respect to lending were not based on the economic theory of supply and demand. The supply must not be provided to all those who are in demand. It should be regulated to those who are capable of providing the return in time. The demand should be properly assessed before providing the supply or in other words the banks should have ensured that the customers (Demand) were eligible for the loan (Supply). Thus the disparities between supply and demand resulted in the current economic crisis. Alternative solutions for the current crisis The proposed $700 billion rescue package for the current financial crisis is the main alternative solution so far taken by the administration. But the above package has been utilized for achieving political gains by political parties rather than effectively utilizing it for the country’s interest. The democrats have criticized Sen. John McCain and Republican allies who supported banking deregulation. Republicans on the other hand accused that the Democrats blocked reforms leaving taxpayers on the hook for billions. (Miller & Jackson, 2008) One of the disappointing aspects of the current financial crisis is that the political parties and the economists were trying to take advantage from the current crisis in order to safeguard their interests. President Obama has put forwarded lot of remedial measures in the economic, health, and automotive sectors in order to counter the current crisis which resulted in mixed responses. Obama program The Obama package or program for tackling the current financial crisis is aimed at attacking the problems from all possible corners. Obama has proposed reforms in automotive industry, health care sector, tax formats like all the critical sectors in order to bring the economy back in its growing phase. Apart from the $700 billion bailout package of the Bush administration, Obama has recently proposed another $790 billion for the stimulus bill. “The original plan was to give out a $500 tax credit for individuals and a $1,000 credit for earning couples, but these amounts have been reduced by 20% as Congress wrangles on. The revised tax credits are now for a whopping $400 for individuals and $800 for couples. And you’ll only get full credit if you earn $70,000 or less per person” (Valley) Obama program will affect only the rich segment of the community. Middle class families will get a substantial tax reduction from their income. Obama has realized that the current crisis has affected the middle class and poor families and it is essential for the administration to help these segments to come out from the present crisis. Apart from the tax sector, Obama has proposed reforms in energy sector, health sector, and automobile sector also. Energy crisis is going to be a worse than the current financial crisis in the near future itself. Obama has proposed three major provisions relating to energy include the construction of a national smart grid, the modernizing of 2 million homes for energy efficiency (as well as federal buildings) and the doubling of renewable power production within three years. A total of $350 billion will be allocated to “investments”, which would include renewable energy as well as health care, roads and school upgrades. (Lane) Obama’s proposal for the health sector has been included in the $825 billion economic stimulus package. It allows many U.S. residents to retain their health insurance without additional burden. “According to Obama, the stimulus package would help about 8.5 million residents retain their health insurance through federal subsidies for COBRA and an expansion of Medicaid” (President Obama Discusses Details Of Economic Stimulus Package In First Weekly Video Address) In the automotive sector Obama has asked the automobile manufacturers to concentrate on making fuel efficient, environment friendly cars. Even though, the customers need to spend around $ 1500 extra. Obama has asked the manufacturers to cut new vehicle carbon emissions and raise mileage by 30 percent, while also reducing oil needs and changing the kinds of cars Americans buy. (Obama unveils mpg rule, gets broad support) Criticisms of the Obama program by the CATO Institute Obama program has created mixed reaction from the economic pundits. CATO institute has mainly criticized Obama’s policies in the health care sector. The main criticism by CATO was against the health insurance policies of Obama. The Obama proposal could make the health insurance more expensive by including unwanted benefits like abortion policies in the health insurance package. “The bills now before Congress say that while you wont be immediately forced to switch from your current insurance to a government-specified plan, youll have to switch to satisfy the governments requirements if you lose your current insurance or want to change plans. (Tanner) Moreover, President Obama supports the creation of a public insurance program with the help of private insurance companies. Most of the public health programs run under the government supervision are already created more problems rather than benefits. So a complete takeover of health care system by the government is witnessed anxiously by experts. The increased health insurance expenses as per the Obama proposal may force the American public to stay away from the insurance schemes. “The final health-care bill is expected to cost more than $1 trillion over the next 10 years. That means much higher taxes, and not just for the wealthy. In short, when it comes to claims about the wondrous new world of government-run health care, a bit of skepticism might be in order” (Tanner) Criticisms of the Obama program by Paul Krugman Krugman likes partisanship, and Obama does not. In a revealing column in January 2007, Krugman cited Obamas lament that "politics has become so bitter and partisan," and rejected the Senators suggestion that we have to become less partisan in order to solve our problems. In Krugmans view, we need an FDR, not a consensus-seeking Eisenhower. Politicians have "to tackle the big problems despite bitter partisan opposition." (Sunstein) Obama wanted to reach a consensus among the politicians in order to tackle the current problems. In other words, he was favoring a collective and wholehearted effort from the American politicians and the public to address the current problems. But Krugman think exactly the opposite of the Obama views. In his opinion, brave decisions are needed at present from the part of the president than consensus. It is difficult to make brilliant decisions if the president seeks consensus since the political parties are already divided over the issue of tackling the current crisis. “Krugman insisted that politicians who seek "a new New Deal" should welcome the hatred of the right. Obama doesnt hate those who disagree with him, and he does not welcome peoples hatred. Krugman seems to hate that” (Sunstein). Krugman believes that any right decision to streamline the economy will definitely affect some people. In other wise some kind of polarization or partisanship is required at present to overcome the current crisis. Obama tries to know the opinions of all before taking decisions whereas Krugman believes that stiff opposition is a common thing behind a good decision. Criticisms of the Obama program by Joseph Stiglitz Stiglitz had been hammering at Obama’s economic team for its handling of the financial crisis. He wrote that the stimulus program was too small to be effective. Stiglitz also had called the administration’s bailout plan a giveaway to Wall Street, an “ersatz capitalism” that would save the banks’ investors and creditors and screw the taxpayers. (Lanciotti). Stiglitz strongly opposes the current bailout package as he believes that the tax payer’s money is for their benefit rather than that of the greedy private organizations. Moreover the current stimulus program proposed by Obama is too small in size which may not be enough to tackle the current problems considering the depth of the crisis. Stiglitz accused Obama of trying to keep the financial institutions in its present form rather than breaking them or restructuring them in order to tackle the current crisis. In his opinion Obama’s efforts will not yield any success since it is not easy for the government to save the big financial institutions using the public money alone. He argued that the collapsing banks or the financial institutions must think in terms of breaking up or merger with some other similar organizations to stay in the market. Most economists at the University of Chicago do not think government action is prudent because the stimulus is too small and it takes too long to work its way into the system; Joseph Stiglitz and Paul Krugman have made these same points. (Pratch, Ph.D) Defense of Obama program by Lawrence Summers Despite the criticisms by Joseph Stiglitz and Paul Krugman, Obama has found a strong supporter in Lawrence Summers who argued that the Obama’s programs are in the right track to streamline the distorted American economy. He argued that in this crisis, doing too little poses a greater threat than doing too much. Any sound economic strategy in the current context must be directed at both creating the jobs that Americans need and doing the work that our economy requires." (Spring) He argued that any measures taken by the administration must aim at increasing the job opportunities along with sustaining the existing opportunities. For that purpose bailout, stimulus like packages is essential and moreover, he favored even further assistance to the private companies from the Obama administration in order to prevent more people losing their jobs. Conclusions The present financial crisis has created a hot debate among American public about the way of tackling it. Some people endorse the bailout and stimulus packages while others criticize it. President Obama has formulated certain strategies to attack the problem from all possible corners. He has sought the opinions of all the others especially that of the political leaders’ before formulating his strategies. He has proposed reform strategies in health, automotive and tax sectors in order to overcome the current problems which have been criticized by famous personalities like Paul Krugman and Joseph Stiglitz. They believe that the bailout packages are like looting the money of the tax payers and the consensus method adopted by Obama may prevent him from taking brave decisions. Works Cited 1. Bianco, Katalina M., J.D.2008. “The Subprime Lending Crisis: Causes and Effects of the Mortgage Meltdown”. 2 August 2009. 2. Miller, Joe & Jackson, Brooks. 2008. “Who Caused the Economic Crisis?”. 2 August 2009. 3. Spring. 2009. "Obama Taps into Belfer Center Community for Key Policy Posts". 2 August 2009. 4. Pratch, Leslie Ph.D. 2009. “Information Asymmetries Part II”. 2 August 2009. 5. Lanciotti, Terry. 2009. “Joseph Stiglitz… Or 2 The Obama Administration, Joe ‘Lipschitz”. 2 August 2009. 6. Tanner, Michael D. 2009. “Perils of Obamacare: The Three Big Lies”. Cato Institute. 2 August 2009. 7. Valley, Silicon. “Obama’s Stimulus Package: Details On Tax Cuts and Spending”. 2 August 2009. 8. Lane, Jim. “Obama stimulus package details report: biofuels investment misses list of top 3 energy priorities”. 2 August 2009. 9. “President Obama Discusses Details Of Economic Stimulus Package In First Weekly Video Address”.2009. 2 August 2009. 10. “Obama unveils mpg rule, gets broad support”.2009. MSNBC.com. 2 August 2009. 11. Sunstein, Cass R. 2008. “Why Is Paul Krugman So Hostile To Barack Obama? The New Republic”. 2 August 2009. Read More