Obama's Bailout Plans, the Stimulus Bills, and the Federal Reserve - Term Paper Example

A Macroeconomic View on the Obama's Bailout Plans, the Stimulus Bills, and the Federal Reserve Introduction The financial crisis that severely hit the United States has spawned a string of political and economic reforms that largely affected the economy. Now that US President Barack Obama is in town, several economic plans have been introduced in order to stave off the effects of global economic crunch, create jobs, and bail out a number of financially troubled banks, automobile companies and even small businesses. Bailout plans As the Obama administration now tries to combat the financial crisis, the amount of rescue plans remains uncertain, but some financial experts said it could reach $8 trillion. The bailout mania started last year, when the Bush administration allocated $29 billion for the Federal Reserve's rescue of Bear Sterns, $178 billion was set aside by the U.S. Treasury to help average Americans, $300 billion was used to bailout homeowners affected by the housing crisis in July, $200 billion for the release of Fannie Mae and Freddie Mac in September, and another $50 billion and $25 billion were used to save money market funds and car companies, respectively. Stimulus packages were also injected this year, as the Obama regime unleashed a mammoth $787 billion in February to combat unemployment and another $275 billion was allocated also in February for nine million homeowners to refinance their home loans in order to prevent threats of foreclosure. Another wave of economic rescue plans were bared in March, such as the $30 billion to again lend financial assistance to American Investment Group (AIG) hit by the banking crisis last year, $15 billion to help troubled small businesses, $1 trillion to try to save toxic assets from the balance sheets of financial institutions, and $ 22 billion to assist two automakers, General motors and Chrysler. The latest of the bailouts is the $1 trillion stimulus package as a result of the G-20 meeting in London in April. Given this uncertain amount of bailouts and stimulus packages, the office of the President, the Federal Reserve and the U.S. Treasury have joined forces to try to combat the effects of the global economic mayhem that not only hit American soil, but a number of developed countries as well, like Great Britain, Germany, France, Australia, Canada, China, among others. Millions of American jobs are at stake, and thousands of businesses- large or small- are also at risked of getting sideswiped by the financial turmoil. The fear of massive unemployment due to the unprecedented closure of big businesses like banks, car companies, and even small businesses galvanized the Obama administration into action by injecting stimulus packages that are aimed at saving the economy. Based on the U.S. government's forecast, joblessness will stand at 8.1 percent this year, but the figure is expected to drop to 7.9 percent in 2010 (Dickson). This means that hundreds of thousands, if not millions, of American workers are at risk of being pushed out of their jobs. Recession in the United States was said to have reached an alarming level, as businesses continue to be severely affected and unemployment rate continues to escalate. Now, the Federal Reserve is playing a major role in trying to solve the financial crisis that continues to threaten the U.S. dollar. However, will the Federal Reserve solve the economic crisis or will it only worsen the problem The Fed and the monetary system The Federal Reserve System, which was created in 1913 during the term of former U.S. President Woodrow Wilson by virtue of the Federal Reserve Act, is a semi-public monetary institution. This means that despite the word "federal," this institution is not 100-percent owned by the federal government. Since the creation of the Federal Reserve, economic crunch became unavoidable due to the inflationary nature of America's monetary system. In fact, a number of well-known critics of the Federal Reserve, which is beyond the control and supervision of the U.S. Congress, argue that it has the power to create money out of nothing, which means that it can inject countless of paper money into the economy even without being backed by gold or anything of real value. This also means that every paper money to be printed by the Federal Reserve shall become an obligation of the American government. Simply put, the monetary system the U.S. government adopted since 1913 creates perpetual debt, a scheme that establishes the creation of monetary obligations without end, manipulates interest rates, and perpetuates inflation. Since the Fed consists of private elements, the people who compose of this semi-private institution are appointed by the President. They are the Board of Governors, headed by its Chairman Ben Bernanke, members of the Federal Open Market Committee, 12 regional Federal Reserve Banks, members of the privately-owned banks, and members of advisory councils. Among the main functions of the Federal Reserve System are the following- 1) to fix alarms of banking panics; 2) to act as the central bank of the U.S.; 3) to control and oversee banking and semi-banking institutions; 4) to look after the credit rights of American consumers; e) to guide the money supply of the United States; 5) to fix interest rates, and so on (Choudhry 258). The current money-creation system of the Federal Reserve is the "fractional reserve banking system," which simply means a bank can create money out of nothing (Kennedy 133). However, based on the Federal Reserve itself, it can only create money according to the following pointers- 1) the purchasing behavior of the people; 2) the totality of economic transactions in the economy; 3) the quantity of wealth that individuals and business entities want to put aside; and 4) the given up gains or income of holding monetary assets in money. So based on these indicators, can the Federal Reserve simply print money out of nothing in order to save the U.S. economy If it prints money out of thin air, what will happen to the economy- will it save the economy or threatens it Based on the given functions of the Fed, this powerful monetary institution cannot just play a role in solving the economic crisis. There are other government branches that must be taken into account, like the executive branch and the legislature. There are also certain measures to be considered before the Federal Reserve can step in to help curb the effects of economic turmoil. One of these is the constitutionality or legalities of its actions. The risk of inflation Inflation is one of the main reasons why the Federal Reserve cannot just move forward in order to save the economy. While it is true that this central bank can simply create money out of nothing, the unprecedented increase of money supply can pose perils to the U.S. economy. The more money supply is there in the market, the lower the value of the currency, which means the money of every American consumer would buy less and less. This is one of the perils that the government and economists try to avoid. The question now is- what is the impact of the trillion-dollar worth of stimulus packages on the American economy In actuality, the Federal Reserve is trying to regulate the money supply by altering interest rates through a method called the Federal Funds Rate. Last year, the Federal Reserve lowered the interest rate to 0.25 percent. What is then the effect of this action This means that the Federal Reserve is trying to persuade financial institutions to loan to each other at a lower rate in order to stimulate the economy. Inflation, a term used to describe the increase in the level of prices of services and goods, is the main outcome of this system, as the Federal Reserve encourages public borrowing while the money supply increases. The funding of the multi-billion dollar bailout is through the issuance of treasury securities, such as treasury bonds, treasury notes and treasury bills, which are all guaranteed by the U.S. government through the U.S. Treasury. Billions of dollars in treasuries were issued in the past few months until the amount reached more than $800 billion. Buyers of these billions of dollars in treasuries include wealthy individuals, financial institutions, and even big economies like Japan and China. Does this system affect the value of the U.S. dollar The Federal Reserve through Chairman Bernanke announced that it will purchase some of the long-term treasuries by printing paper money worth trillions of dollars. If this happens, devaluation of the U.S. dollar would be expected since countless of paper money would circulate in the market. Based on the theory of monetarism, changes in money supply have enormous impact on economic progress, including business performance in a macro-economy. According to Milton Friedman et al. (2), one of the main proponents of this concept, monetary supply depends upon a number of economic variables. For instance, if there are more money supply circulating in the market, consumers would be encouraged to buy more in order to satisfy their daily requirements. However, if there are less money supply, there would be less spending, a situation that would also limit the flow of wealth. With the economic trends going on in Washington, it is clear that the Obama administration largely subscribes to both monetarism theory and Keynesian concept, which points out the relation of unemployment to inflation. On the other hand, some of the signs that the Obama administration adopts monetarism are the following: regulation of money supply through the Federal Reserve to stimulate business movements across the economy and to curb inflation; an unstable percentage of unemployment; manipulation of interest rates; and ominous regulation of the economy. The President's role President Barack Obama enjoys overwhelming support not only of the American voters, but also of congressmen and senators. This means quick legislation of proposed stimulus bills that aim to solve or mitigate the effects of global financial crunch. Because of his guaranteed support in the U.S. Congress, the President can easily fast track his economic policies without any strong opposition. The result of a Democrat-dominated Congress are the already signed trillion-dollar stimulus bills that rescued American homeowners, the jobless, financial troubled banks and automakers, among others. Without the President's backing, the Federal Reserve could not have benefited from several economic policies like the expanding of its program to boost lending. The Federal Reserve even cut interest rate in order to encourage banks to loan with each other, an effective way to keep the economy afloat. Over the years the Federal Reserve kept on lowering its key fund rates in an attempt to improve the economy. However, despite the fact that interest rates bottomed to almost zero central bank is not working, or is even contributing to the continued slump of the U.S. economy. As a result, Alan Greenspan, former chairman of the Fed, was summoned by the U.S. Congress in order to explain how the U.S. got into this financial crisis. The former Fed chairman was being blamed for the economic catastrophe, and he admitted that he was "partially" wrong in his economic decisions (Andrews). The global economic turmoil demands an answer to this question- was the crisis caused by free-market capitalism or by federal regulation Among the most vocal and outspoken lawmakers in the U.S. Congress is Republican Rep. Ron Paul who has been pushing for the abolition of the Federal Reserve. The 2008 presidential candidate said that what must be solved at this point in time are not the toxic assets but the ineffective, inflation-causing Federal Reserve System. Hence, he urged the U.S. Congress to condemn the central bank as a failure because of its blatant manipulation of interest rates and money supply that continues to pull down the economy. Conclusion The current economic predicament of the United States is one good case study for modern-day economists. There are countless of questions that hang in the balance as the Obama administration continues to bring in multi-billion dollars of stimulus packages and pressure market players in Wall Street through federal regulations. The Federal Reserve is playing a big role in trying to stave off the crisis with its manipulation of interest rates and its promise to purchase multi-billion dollars of treasuries, an action that would increase money supply. Solving the current financial mess will not be that easy, as it requires the cooperation of not just the Federal Reserve, the Department of Treasury, and the U.S. Congress, but also big and small businesses that play an important role in uplifting the economy. With trillions of dollars now used to bailout banks, auto companies, homeowners, small businesses and unemployed Americans, the Obama administration expects to see better results next year. On the other hand, the Federal Reserve's plan to purchase a number of treasuries will not be good to the economy, as it could cause the devaluation of the U.S. dollar. In the area of macroeconomy, perhaps there is a need to look at the experience of Germany in the early 1920s when the Weimar Republic issued trillions of Mark banknotes to confront post-World War I crisis. To save its deeply troubled economy, the Weimar regime through its Reichsbank issued a banknote with a face value of 100 trillion Mark, a decision that caused hyperinflation in Germany. Unprecedented rise in the prices of commodities followed due to the high imbalance between money supply and number of goods circulating in the market. The current American experience shows that the Obama regime is trying to curb financial crisis by injecting stimulus packages worth billions of dollars into the economy. This political and economic action is being complemented by the Federal Reserve, which continues to manipulate interest rate and print money out of thin air. However, the American government cannot escape the adverse consequences of its actions- a threat of inflation. Inflation, which brought down a number of formerly prosperous nations to their feet like Germany and Hungary, is part of economic reality. The stimulus bills and bailout plans, while they are being unleashed in the name of common good, can be very dangerous not only to the economy, but also to the civil liberties of the American public and to the position of America in the global community. List of References: Andrews, Edmund. Greenspan Concedes Error on Regulation. New York Times 23 October 2008. 2 May 2009 http://www.nytimes.com/2008/10/24/business/economy/24panel.htmlincamp=article_popular Dickson, David. "Unemployment will be higher in U.S." Washington Times 1 April 2009. 2 May 2009 Choudhry, Moorad. The Bond and Money Markets. Maryland: Butterworth-Heinemann, 2001 Friedman, Milton, Horrox, Alan, McCredie, Gillian, Bruegel, Irene. Money Talks: Five Views of Britain Economy. London: Taylor & Francis, 1983 Kennedy, Peter. Macroeconomic Essentials. Massachusetts: The MIT Press, 2000 Read More