The Recession in 2008 and What Has Been Done Since - Term Paper Example

The Recession in 2008 and What Has Been Done Since Introduction Just a week after 2008 began, brokerage company Merrill Lynch already declared that the United States is in recession. The conclusion was based on the high unemployment rate in the country, which rose by 60 basis point since March 2007—a rate which has not been reached since 1948 (“US Recession”). However, it was not until December that year when the National Bureau of Economic Research officially declared that the United States is in recession (“US Economy”).

This essay will discuss the events that led to the “official” recession of the United States in 2008 and what the federal government has done in response. Events Leading to the Recession Despite its wide-ranging effect, a recession does not happen all of a sudden. It happens slowly and gradually, over an extended period of time. First, people cut back on their spending on goods and services. Then producers, such as factories, cut down on their production. As a consequence, many people become unemployed.

Unemployment results in huge income declines and ultimately the stock market falls into instability. Such conditions described by Harris cause the slow-down in a nation’s economy. As this slump continues for a longer period, the recession becomes official. This is exactly what happened to the United States two years ago. By September 2008, job losses in the United States already reached 6.1 percent, with the total number of unemployed Americans hitting 605,000 (Isidore). The decline is just one of the successive monthly declines since December 2007.

The high unemployment rate is the main reason behind NBER’s declaration in December 2008 that America is officially in recession (Dickson, “Panel”). By the time recession became “official,” 7.8% of the working population was already unemployed (United States, “Unemployment”). Federal Policies and Interventions to Fight Recession Since an economy slows down during a recession, it is the job of the government to stimulate it back to its normal activity. Among its efforts in stirring the economy is the $50 billion insurance the Treasury Exchange launched for the money market back in the third quarter of 2008.

The government intended to encourage investors to purchase money funds by covering their purchases. Similarly, the Federal Reserve offered $230 billion insurance to the money market for those assets that are illiquid (Gullapalli and Anand). Even before the recession became imminent during the third quarter, the federal government has already taken several steps in order to boost the economy. In February 2008, the Bush administration launched a tax rebate plan for individuals and tax incentives for business.

The legislation provided as much as $1,800 tax rebates for individuals while businesses were charged 50% less in taxes for every “new equipment and other fixed assets” they bought (Perez). Between April and July 2008, the government has given a total of $93 billion tax rebate to ease the burden of recession-hit taxpayers (Dickson, “Income”). A month prior to that, the Federal Housing Administration raised the maximum housing loan it will insure up to $750,000. The FHA also authorized Fannie Mae and Freddie Mac to increase its limits for jumbo loans up to 150% percent of the typical home price (Campbell).

These policy changes by the FHA also included a cut down on interest rates and insurance for mortgage lenders. In August that year, the FHA tried to keep as many as 400,000 homeowners from losing their homes by encouraging lenders to lower interest rates in exchange for federal insurance. The program, known as the Housing and Economic Recovery Act of 2008, will continue until the end of September, 2011 (United States, “Housing”). Another tax incentive to stimulate the housing industry and revive the whole economy is allotted for individuals or couples who buy a new home for the first time.

The tax credit is equivalent to 10% of a property’s total value, with the maximum credit set at $80,000 (United States, “First-time”). To aid failing banks, FDIC has become more prompt in its intervention. On the final week of September 2008, FDIC bought weakening Washington Mutual and sold it on the same day. The proceeds were used to cover the deposits of its clients. The same was done for IndyMac BanCorp, which went bankrupt on the same month (Evans). Also, the government launched the Car Allowance Rebate System in August 2009 in order to encourage car owners to buy newer and more fuel efficient cars and to consequently shore up the auto industry.

Up to $4,500 in rebate were given to those who availed the program (“Car Allowance”). Assessing Federal Decisions Basing on the job market’s condition, the stimulus packages launched by Bush and Obama have done very little to fight unemployment. Since February 2008, when Bush signed the Economic Stimulus Act of 2008, unemployment saw a sustained increase, rising from 4.8% that month to 9.5% in June 2009 (United States, “Unemployment”). However, the high unemployment rate belies what the federal government has done to help the economy.

In contrast to the unemployment rates during the Great Depression, the government has done well in keeping the number of unemployed to no more than 10% of the working population. It is a sign that the stimulus packages have helped many companies stay in business. Meanwhile, the tax incentives for first-time homebuyers have shown some positive effects as it boosted the sale of previously owned homes in February 2010 (Armour). However, it was not at all times that government tax incentives were able to stimulate the economy.

When taxpayers were given tax cuts to boost economic activity for the third quarter of 2008, they chose to pocket their incentives as they anticipate the country’s deeper plunge into recession (Dickson, “Income”). The decrease in spending only caused the country’s economy to perform poorer. As the government continues to offer more tax incentives and stimulus packages to different industries, the budget deficit naturally went up. As of last year, the federal deficit reached $1.41 trillion (Chantrill).

Once the United States is fully out of recession, it has to face another task: that of paying back the debts and deficits it acquired as it tried to prop the falling economy. This will have serious consequences on the part of tax payers since the tax incentives Americans are enjoying right now are expected to ricochet as tax increases in the near future. Conclusion Many economists believe that the United States is already out of recession after more than two years of slump. This is a strong indication that U.S. fiscal policies have succeeded in fighting recession.

The recession has once again proven the resilience of Americans in surviving economic downturns. However, taxpayers may have to pay more taxes soon in order to prevent the federal deficit from escalating higher. The implications of the stimulus packages on the government are yet to be seen. If the economy does not fully get back on its feet soon, the federal deficit may continue to rise. Works Cited Armour, Stephanie. “Will Tax Credit Help First-Time Buyers Ignite Home Sales?” USA Today Economy.

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