Aftermath of the 2008 Financial Crash - Essay Example

Aftermath of the 2008 Financial Crash (Austerity or Stimulus) Aftermath of the 2007- 2008 Financial Crash (Austerity or Stimulus) The financial crash of 2007-2008 is considered by many to be the worst economic crisis since 1939 during the great depression (Soros 2008). The financial crash is blamed majorly on the over lending of money by lending institutions without enough securities. The financial crisis resulted in financial institutions going bankrupt, thus bail outs from their respective governments, job cuts and general fall of economies especially in Europe. Austerity is cutting back on spending particularly on amount of public services and benefits. Austerity policy is usually used by governments to reducing defecate spending. Major characteristic of austerity is increase in taxing. Stimulus is where monetary policies are used to positively stimulate the economy. This is normally done by quantitative easing and the lowering of lending rates. Austerity is putting many countries especially those in Europe in a deeper mess. This is because it is causing a lot of difficulty than solution. So I believe it is not the best way to deal with the aftermath of the financial 2007-2008 financial crash. This is because the high tax rates are resulting in very minimal tax revenue. It is also getting harder and harder in making cuts on spending. According to Woods (2013), austerity has completely failed in countries like Greece to appoint where its output is declining. In other countries like the United Kingdom, government leaders have admitted that they were unable to reach their targets in 2010 even after slashing back on budgets and government spending (Davidson, 2013). The Exchequer chancellor George Osborne when giving his report to the House of Commons he stated that they had minimized government spending by up to 30 percent by the year 2010 hopping that they would reduce the nations deficit of the budget to zero percent in a period of four years and at the same time they also forecast that the country would have cleared all its public debt (Davidson 2013). However, their expectations were not met. Up to today none of the government forecasts on the outcome of their austerity measures has happened. Britain is still running on a budget that has a high deficit, and it has entered an even worse situation before the austerity measures (Davidson 2013). This clearly shows that austerity is not the way to go about the after math of the financial crash. Having seen that austerity policies are not working in many countries, then I propose stimulus to be the best option to deal wit the after math of the 2007- 2008 financial crisis aftermath. This can be proved by using the United States of America as an example. The United States of America implemented both austerity and stimulus policies to deal with the after math of the financial crash. In 2008 the United States of America Congress adopted a $158 billion tax cut package and in 2009 $787 billion unemployment fund (The New York Times, 2013). Te previous tax plan did not take a major effect in minimizing the United States’ deficit. However economists argue that the stimulus plan helped the United States of America’s economy to recover and even minimized job losses greatly. The dispute on measures to cope with the financial crash after math is mainly between the Keynes stimulus and the orthodox economics. As the theory of Keynes suggests, that in the short run, aggregate demand greatly influences product activity. Being so in stimulus amount of money to be put in the economy is greatly influenced by the demand aggregate demand for the boost. This means that the amount of money to be boosted in economies as a result of the Financial crash largely depends on the level the economy has fallen. The orthodox economics insist that economic decisions are influenced by availability of finances and other market powers. The dispute between Keynesian and orthodox when it comes to stimulus is the fact that governments put money in their economies to boost them depending on how much the economy has fallen rather than boosting money into the economy depending on the availability of funds. A Fiscal multiplier is the measure of the change in national revenue in relation to changes in governments spending that result to changes in national revenue. The fiscal multiplier has a significant relevance as it is used to measure if the stimulus plan taken by a government is working, and if it is economical. In short it helps the government determine if the stimulus plan they have chosen is resulting in positive or negative impact to the economy. One problem in implementing a fiscal stimulus is the fear that it might lead to an increase in interest rates. This because, governments need to get funds in order to put them into the economy to boost it. Mostly governments result in overseas borrowing and public borrowing. This can increase lending rates because when the government borrows a lot of money it creates a high demand for borrowing in financial markets. Another problem that might face applying the Keynesian stimulus is the fact that stimulus can also result in a decrease in exports. This will in turn lower the national income and output. This is because when interest rates increase as a result of the Keynesian stimulus it in turn attracts foreign investors thus attracting foreign capital. This is because foreign investors know that government bonds have a high return as a result of the high interest rates they are borrowed with. This affects the economy in that local companies that wish to undertake projects must borrow money in higher rates as they face high competition from the government in borrowing. This results in the companies borrowing money at very high rates from foreign lending institution which leaves them to make very low profits as a result of the high rates at which they pay back their loans. This is how national income and output is affected. Another major problem that Keynesian stimulus faces is the fact that there is a lot of time involved from the time a stimulus policy is implemented and when notable effects to the economy are realized. This is why many people are very pessimistic about plans to implement a stimulus policy. They base their arguments in the fact that no notable difference in the economy. However, economic change in the short term is hard to realize. It needs very deep economic knowledge to notice economic changes in the short run. Austerity as a solution to government debt has proved impractical due to a number of problems it has faced. One problem that has faced almost all governments that have tried to use austerity is determining on what government spending to cut on (Woods, 2013). This has been so because, determining on what spending to cut on can be viewed as biased. Another problem implementation of austerity has faced is that tax increases have led to decrease in tax revenue. According to Romer (2013), combining cuts on spending and tax increases has led to a disaster especially in Europe. A good example is Greece. Greece implemented a series of austerity policies in order for the country to get loans from the European Union in 2010 Krugman, 2013). Three years down the line, Greece has an outstanding debt of two hundred billion Euros (Krugman, 2013). At the same time bond bearers in Greece have lost up to seventy percent of the value of their bonds as a result of the austerity measures the Greece under took. There are a lot of signs in countries that implemented a stimulus policy that the Keynesian policy does in fact work. A good example is the situation in the United States of America. The Economy of the United States is getting back on its feet slowly by slowly. Companies have started rehiring more staff and job cuts have been on the low since the stimulus measures were implemented by the United States Government. Companies that had filed for closure and bankruptcy are slowly coming back on their feet. The situation in Europe clearly indicates that stimulus policy implemented in the United States is clearly working. This is because both the United States of America and Europe hugely suffered as a result of the 2007-2008 financial crisis. However the situation in the United States of America is far much better than the situation in Europe. Many countries in Europe are suffering from bad debts and are still operating in a deficit budget. Many people argue that the stimulus policy is not the solution to the after math of the financial crash. People should know that every good thing took time to build. As is the case the case stimulus measures will not take effect immediately. But gradually it will take effect and in the long run restore the economy to even a better point. All it needs is good policies and decisions to ensure that the Keynesian stimulus will work. European countries should follow the in the footsteps of the United States of America and surely they will find themselves out of the deep mess they are in. References Cottarelli, C. (2012). Beyond the Austerity Debate: the Deficit Bias in the post-Bretton Woods Era. IMFdirect. Retrieved from: http://blog-imfdirect.imf.org/2012/05/21/beyond-the-austerity-debate-the-deficit-bias-in-the-post-bretton-woods-era/ Bretton Woods Project. (2012). IMF controversy: is austerity backfiring? Retrieved from: http://www.brettonwoodsproject.org/art-571588 Cassidy, J. (2007). It’s Official: Austerity Economics Doesn’t Work. The New Yorker. Retrieved from: http://www.newyorker.com/online/blogs/comment/2012/12/austerity-economics-doesnt-work.html Jackson J. K. (2010). Financial Crisis: Impact on and Response by the European Union. Diane. Pennsylvania. Krugman, P. (2013). The Big Fail. The New York Times Company Retrieved from: http://www.nytimes.com/2013/01/07/opinion/krugman-the-big-fail.html?partner=rssnyt&emc=rss&_r=2& Soros G. (2008). The New Paradigm for Financial Market: The Credit Crisis of 2008 and What it Means. Public Affairs. New York. Woods, N. (2013). ‘IMF have learnt lessons of austerity. 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