Monetary and Fiscal Policies in the United States - Research Paper Example

RESEARCH The United s of America has in the recent past experienced a crush in the financial markets which was occasioned by interrelated issues in the fiscal and monetary front. There was some degree and level of public outcry which demanded that the federal government pursues a series of monetary and fiscal policies so as to avoid such a scenario from ever happening or recurring in future. This research paper and study thus endeavors and purposes to explore the options that would ensure that the same financial crush is never witnessed again in history. In principle, the paper will articulate remedial measures to ensure the financial crush which was necessitated by voidable circumstances does not recur. Introduction Economists and social scholars have termed the crash of the financial markets in the United States of America as a self-serving failure on the part of the regulations of the government. There were lapses and loopholes in the fiscal regulation deposed and an unimplemented by the government contributed to the financial crush. At this point and level, it may be needless to stress on the effects and impact of the financial crash since the effects and extent of the crash was felt far and wide. It however did cost the country as a whole to revive the economy such as the banks being forced to give mortgages band loans to people without proper credit worthiness record (Hartmann, Straetmans & Vries, 2004). Analysts and economic observes have raised concerns and issues such to the direction that the extent of the negative effects and consequences of the financial meltdown could have been avoided if there were proper regulations on banks and micro-credit institutions which gave out mortgages. Statement of the problem In order to pursue this research to its logical conclusion and end, it would be imperative to gauge the macro and fiscal regulations which would be introduced along government policies to control the effects of the crash. Thus, this paper will delve into the concept and issue of fiscal policies which would be introduced hand in hand with the remedial policies by the United States government to help caution and prevent the economy in going into another financial markets crash. In principle, there are sectors and areas which would prove beneficial to this study so as to arrive at informed inference and recommendation (Hodgson, 2009). They include the policy sectors, the bank regulatory authorities and the financial markets as a whole. Therefore this research and study will seek to explore means and avenues which will caution the economy of the United States of America from relapsing back into the financial market crash while focusing on the policy, banking and financial authorities and policies. Definition of terms Financial market crash in this sense and respect refers to the situation and instance where financial assets, mortgages or the price of bonds or anything of value losses its value over a short period of time. The fall in price could be induced through hoarding or by lack of stringent rules to ensure microcredit institutions offer credit cautioned by the economic realities in a country. Fiscal policy in this study refers to the measures and remedial caution taken by the government towards influencing the level of employment, aggregate demand and output. These moves and measures are taken in the form of government expenditure, borrowing, foreign reserves and taxation so as to control the output, level of employment and the aggregate demand in the economy as a whole. Monetary policy in its part refers to the measures and moves taken to control the supply of money in the economy. This could be by increasing or reducing the amount of money in circulation in the economy with the aim and intention of controlling inflation. It also affects the interest rates and rates of borrowing and to stabilize the currency and financial markets in general. Theoretical or empirical framework This study and research draws its focus and foundation from the financial markets that occurred in 2008, where most banks and individuals lost in the mortgages and loans that they had received. There was a global outcry because the United States of America being a super power in the world is interrelated to other sectors of the economies of the world (May, Levin & Sugihara, 2008). In practice, companies were selling mortgages to people who they knew very well were not able to repay them back for what they did and in turn the companies sold the credit to banks at a higher profit. After some time as the cycle continued, the banks were lending out more money as compared to what they had in their own stocks thus the cycle spiraled and the banks collapsed. A practical case and example was the Lehman Brothers bank which lent to customer with poor credit repayment ratings. The bad debts was sold in the form of layered mortgage back securities and in the end made banks to collapse since they were lending more that they had in their stocks. It is not enough to say that greed of microcredit institutions spiraled out of control, rather the government as whole ought to have acted and initiated measures to caution the economy and the public as a whole (Soros, 2009). It is prudent to explore the specific actions such as the enforcement of proper regulation against the microcredit institutions to ensure they were not selling bad debts to the banks. The banks also in their part ought to have counter-checked the credit worthiness of the people who bought the layered mortgages from the credit institutions. Methodology Type pf research Given the nature of this research it is exploratory in nature because of the line of the question which it seeks to answer. There is the question and concept of welfare and actual numbers it would follow to be a cross and mix of research studies. There is a qualitative and quantitative aspects of the research. The qualitative or the welfare aspect seeks to inquire how the financial markets as a whole affected the quality of life of the people who bought the bad debt, the massive layoffs in corporation and stress put to families and people as they coped to keep up with the hard financial times (Reinhart & Rogoff, 2008). Similarly, there is a quantitative aspects in this research since I would seek to establish the actual extent of financial loss to the banks and the families. How the people lost money, the percentage of banks and families affected by the financial meltdown in the course of the hard economic times. Respondents The policy makers, bankers, the credit companies and the people who bought the debts would all form the huge body of the respondents and research participants. This is so because each and every part of the respondents would play a critical role to ensure that the issues raised are respondent to aptly and properly. For instance the policy makers will give their opinion and input on what they believe ought to have been done and what will be done in future to avoid such a relapse in subsequent times (Rose, 2010). The bankers would also give the exact extent to which the meltdown affected their financial repertoire, their images, and customer confidence. The credit companies were the sellers of the bad debts, thus their input would guide the study to understand what motivated them to do what they did, why they did it and any future plans as it regards to the issue of selling security backed mortgages. In the same line of thought and respect, the customers would also be beneficial to say how they fared during and after the financial markets meltdown. Any other thought that they may have as it regards to the issue of selling of security backed mortgages. It is important to note and mention that this research and study would not have any static hypothesis which would be proved or disapproved accordingly. This is so because the nature of the study is exploratory in that it would flow freely to its logical conclusion and end without being limited by guiding principles of hypothesis. Literature Review In research this forms the body of what has been done by previous scholars and thinkers in the related line of thought and notion or concept. Accordingly, the effects of the financial meltdown were so dire that the people who witnessed it first-hand had a gruesome experience. This is so because there were massive layoffs and a considerable reduction in the quality of life of people (Brunnermeier, Nagel & Pedersen, 2008). Those who lost their jobs were forced to reduce their expenditures and thus experienced tough economic times and periods. It is particularly express that the people who experienced the tough times would not forget the harrowing experience occasioned by the harsh economic anomie and normalness. Subsequently, subprime mortgages which began to be sold in the year 1999 had a role and duty in the subsequent failure in the financial markets of 2008. This was the genesis since the credit companies gave credit and loans to people who did not have proper savings and loans compared to the amount of saving that they had (Caballero, Farhi & Gourinchas, 2008). A practical case and instance is the Federal mortgage Association which purposed that each and every American at least owned a house gave out loans and mortgages without considering the credit worthiness of people. As expected the level of defaulting on the repayment was on the high since the people who bought the credit had bad repayment ratings. In the long end, the company was threatened and it almost collapsed. The assumption was that the rates were adjustable to the economic realities of the time as opposed to the fixed rate mortgage, which has a degree reduced likelihood on defaulting. In retrospect, there was the risk free aspect since the buyers of the mortgages could sell their houses if they deemed that the repayment risk was on the high side. Economists argued that this was a disaster in waiting in any case the value of the property in the market declined. Data In 2008, there was decline of up to 20% in the financial markets due to defaulting by the homeowners and the fact that the value of their houses were way lower than the mortgage prices. As a result, a phenomenon known as the housing bubble ensured where the pricing index stood at 17% but later fell during the recession to 6% (Bordo, 2008). The value on the shares in stock and property market changed from a dollar to ninety seven cents. The bubble grew from 264 billion to 586 billion dollars. However as the demand fell back and declined after the decline there was a considerable shift in economic realities. Discussion and results The direction of the menace and situation is that the government was to blame due to the happenings of the economic meltdown and financial crash. There was lapse in the government regulations and policies on home ownership. First it was the assumption that the rates were adjustable to the economic realities and not fixed by the terms of agreement. The government sponsored projects and enterprises was occasioned because state did not bother to check in the credit worthiness of the clients and instead was driven by need to give homes to people. It was also improper for the banks and the financial institutions to buy the security backed mortgages without inquiring on the credit worthiness of the buyers of the credit. The credit companies also did not check on the credit ratings of the people whom they sold their mortgages to. Conclusion From the above line of thought and reasoning, it is clear that there are structural lapses in the government policies that did caution the economy as a whole against the financial shocks. There ought to be proper regulations and policies which would see to it that greedy credit institutions are checked. The banks should not buy security backed mortgages from companies without counterchecking on the validity and credit worthiness of the customers. In practice, the government funded mortgage programs should also operate with fixed rates so as to ensure that the repayment of the mortgages and loans are not subjected to economic harshness and fluctuations (Scheffer et all, 2009). A regression model for the prospects of another financial markets crash In a hypothetical state and instance the regression model of the prospects and likelihood of another crash in the financial markets may be formulated as follows. Y=B0+B1X1+B2X2+B3X3+E Hypothetically: Y- financial market crash, B0-inept government rules and policies, B1-failure of banks to check on the credit worthiness of customers, B2- microcredit institutions which sell bad debts, B3-lack of awareness on the part of the buyers. It is important to denote that X is a homogenous term representing a real integer in the form of numbers. For instance in B1X1-means the number of banks, in B2X2 means the number of credit institutions involved. E- Is an error term which covers and factors in any uncertainty in the economic world. In principle, any shock in the financial markets would also be expected which may not have been expected initially. From the above regression model, the other factors such as ineptitude on the parts of the banks and credit firms are correlative. However, the principle determinant or factor in the model is laxed government rules and policies relative to security backed mortgages where the rates of returns were adjustable. Y (financial market crash), is thus the dependent variable since it relies on the other circumstances and factors named above to occur. References Bordo, M. D. (2008). An historical perspective on the crisis of 2007-2008 (No. w14569). National Bureau of Economic Research. Brunnermeier, M. K., Nagel, S., & Pedersen, L. H. (2008). Carry trades and currency crashes (No. w14473). National Bureau of Economic Research. Caballero, R. J., Farhi, E., & Gourinchas, P. O. (2008). Financial crash, commodity prices and global imbalances (No. w14521). National Bureau of Economic Research. Hartmann, P., Straetmans, S., & De Vries, C. G. (2004). Asset market linkages in crisis periods. Review of Economics and Statistics, 86(1), 313-326. Hodgson, G. M. (2009). The great crash of 2008 and the reform of economics. Cambridge Journal of Economics, 33(6), 1205-1221. May, R. M., Levin, S. A., & Sugihara, G. (2008). Complex systems: Ecology for bankers. Nature, 451(7181), 893-895. Reinhart, C. 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