The Economic and Finance Crisis of 2008-2009 - Essay Example

Introduction

The economic and financial crisis of the year 2008-2009 in the Unites States has become a topic of concern and what causes the crises is the major question that has been brewing for a long time. These changes contributed significantly to the drying up of the flow of commodities within the American economy including money thus slowing the economic growth in terms of buying and selling off assets. This hurt the American economy hard since a lot of businesses and individual investors were discouraged and many of the financial institutions were left holding mortgage-backed assets that had fallen in values and would not bring enough cash to service their loans. The paper seeks to describe the historic monetary and fiscal policy efforts that are undertaken by the government of U.S., for example, traditional and non-traditional measures to ease credit markets and stimulates the economy. It also seeks to shed some light on the increasing economic and financial turmoil in the United States looking at the federal reserves and its role in the economy of the United States looking at the three main economic goals.

The financial and economic crisis of the year 2008-2009 is one of the worst crises in the history of the United States are it contributed to the emergence of economic depression in many countries around the world. It posed a lot of threats to the economy of many nations, for example, the crises contributed to the collapse of many financial institutions, increase in unemployment and even collapse of many business activities like stock markets. In many regions, the housing markets also suffered a great deal resulting in evictions, prolonged unemployment, and foreclosure of this facilities thus contributing significantly to the failure of the key economic pillars of the American economy (Bibow, 2010). However, the crisis began as a result of greed among the people and since American economy is founded and built on credit, it required a great credit management tool to drive development agenda for example credit can be used for starting and expanding businesses which in turn creates jobs to people.

Monetary and fiscal policy efforts undertaken by U.S government

The economic and financial crisis began in the United States in the year 2007, and it involved financial institutions like international monetary fund in many countries around the world. It was at this time that economic and financial turmoil turned into a global economic recession that developing and emerging market economies were greatly affected through trade channels and in some instances, employees falling remittances. A lot has been discussed on its impacts on world trade, on countries producing commodities and on countries which have close linkages in terms of trade with the U.S.

Fiscal policy involves the use of government expenditures and taxes as a way of influencing the level of economic activity with the country (it is the counterpart of monetary policy). Just like monetary policy, fiscal policy can be used in trying to minimize or fully close down the recessionary or even inflationary gaps within the country. A lot of tax and expenditure programs change automatically with the changes of the level of economic activity and therefore the government can use these policies to encourage economic growth in terms of boosting business activities when they lower the tax thus creating more jobs. Some of the fiscal stimulus efforts that were passed by the American government in the year 2008-2009 to boost economic growth rate included tax cuts for most of the businesses and increased government spending. All these efforts were designed and meant to stimulate the growth of aggregate demand since the purchasing power of the people is boosted thereby closing the recessionary gaps within the economy. Particular government expenditures and tax systems for example transfer payments are often meant to insulate individual business investors, companies from the adverse impacts of the shocks to the economy. A lot of people become more eligible for the income supplements in situations when the income is falling; therefore, transfer payments help to reduce the effect of the change in the country's real GDP on disposable personal income thus insulating individual households from such changes (Reinhart & Rogoff, 2008).

Economic goals during the period of financial and economic crisis in U.S

• Reduced level of unemployment to create full employment to the citizens

Economic growth rates of a country are determined by the rise in the standards of living of the citizens and the amount of employment opportunities available at every time. When talking about the status of the economy, it is important to mention the level of employment and the standards of living thus making unemployment rates be a topic of concern. An increasing rate of unemployment is a great concern for many nations since it directly affects the economy of the country and one of the economic goals of U.S is to reduce the level of unemployment so as to establish full employment for her citizens. Some of the microeconomic policy goals that were established by both federal and national governments of the United States included country's economic growth in terms of increased employment opportunities, reduced level of inflation and even improved security.

• Stability and security

Security and stability in prices of commodities is a goal of the U.S economy, and it is determined primarily by the rates of inflation and deflation in the country. Inflation takes place when the prices of commodities constantly increase across the board for all the items while deflation occurs when there is fall in prices of commodities across the board. The decrease in the prices of commodities sounds appealing to the ears of the consumers but it is not healthy for the economy for example if business owners cannot make a profit, there will be a loss of part-time jobs. Therefore, stability in prices of a commodity is the ultimate desired goal that any economy can yarn for with a small amount of inflation.

• Economic freedom and equity

Another goal of the United States was to establish economic equity and freedom with a great emphasis on the right of individuals and business organization to independently make a decision of how to use their funds. In the context of the economic goal, U.S recognize equity as fair distribution of the resources within the economy. For example, some of the taxes paid by the citizens of the United States are spent on paying for the services like hospitals and school that all people can use thus ensuring that all people are equal. Despite the fact that a lot of people value the economic freedom of the people especially in using their money, it is important to also value giving a lot of people access to education that relates to the goal of equity.

How the federal stimulates the economy

The primary role of the federal reserves is to undertake its dual mandates to ensure that there are maximum employment opportunities for the people and to ensure that prices of commodities are stable. The federal tries to pursue the goal of ensuring price stability and full employment to its citizens through shifting most of its target interest rates, for example, lowering interest rates in situations when the economy seems to be struggling and in the case where inflation seems to rise it raises the target interest rates. Most of the times, the main tool used by the Fed to control the supply of the federal reserves (federal fund rates) is the purchase and sales of the T-bills that controls the amount of reserves in circulation (Boughton, 2009).

A change in the interest rates may negatively or positively affects the economy as it directly affects the level of consumption, business activities, and the level of investment in a particular country. Low-interest rates increase the level of investment, business and even the consumption rates of the people while high-interest rates adversely affect the economy as it discourages investment, business, and many other positive activities within the economy. The purchasing power of people tend to increase with a fall in the interest rates (the cost of borrowing) and the level of investment and business activities also tend to increase.

Traditional policy operates through a system commonly known as the price easing which requires that as some reserves are increased through open market operation, the price of the reserves (federal funds rate) is decreasing thus stimulating the economy in terms of investment, business and the level of consumption. Once the target interest rate hits zero marks, Fed decides to pursue its dual roles through purchasing financial assets so as to increase the quantity of the bank reserves; this method is commonly referred to as quantitative easing (non-traditional measures). The traditional policy may use changes in the interest rates to stimulate or slow down the level of economic growths it may encourage or discourage business and investment within the economy.

Non-traditional policy (quantitative easing) operates through very many channels for example as the Fed creates a lot of reserves, some of the reserves can be used in the purchase of financial assets thus causing their prices to increase. This reason explains why there is always a rise in the level of stock values during the period of quantitative easing, and this increase in the amount of wealth tends to stimulate more spending. Secondly, non-traditional policies (quantitative easing) also reduces the amount of pressure on the exchange rates thus stimulating exports and decreasing imports which offer another better means of stimulating the economy. In addition, an increase in the level of bank reserves tend to raise inflation expectations and when people become worried about the future rise in the price of commodities, they tend to purchase more now thus providing other means of stimulating the economy. The rise in the inflationary expectations lowers real interest rates and as a result, it stimulates business investment and even consumption of the durable commodities.

Conclusion

Global economic reforms in the U.S. needs to be inclined towards ensuring that there is a coherence among the multilateral systems and the international arrangements that can be used in the management of the monetary and fiscal relationships. The main reason is to ensure that these systems do not continue to be the main point of key macroeconomic and trade imbalance within the country and therefore, the reforms will help in reducing the predominance of financial markets in determining the economic conditions that the governments establish economic policies (Epstein, Grabe, & Jomo, 2004). It is prudent for the governments to allow financial markets to undertake freely their role of executing economic influence on the major economic variables and the economic policy decisions that would otherwise bring financial and economic crises in the future. Strengthening national regulations add control of most of the financial markets is the best method and conditions for obtaining economic stability; however, it is not enough to prevent the build-up of new imbalances in a system that lacks an effective mechanism.