2008-2009 US Economic Crisis and Its Rescue - Research Paper Example

U. S economic crisis of 2008-2009 and its rescue The paper focuses on several causes of the tremendously obnoxious recession encountered bythe world, especially the United States of America (USA) in 2008-2009 and subsequent governments’ endeavor to cope up with the same. Initially, the factors that led to the global economic crisis are mentioned. Then the focus is shifted towards the factors affecting the US economy. The next segment deals with the steps taken by the US administration. Special focus has been provided on the role of President, Congress, Secretary of the State, and Treasury Secretary to curb down the evil effects of the recession from the US economy. The last part undertakes the critical evaluation of the policies undertaken and suggests optimal policy ramifications. The launch pad for the flight of the worst recession in the past six decades around the globe was unleashed in the mid of 2007 and continued over almost two years. The entire global economy remained shivering owing to its evil affects. Moreover this recession jeopardized the roots of the formidable US economy. The dark sides began to erupt with global job crisis and crisis-induced credit crunch that lead to trade collapse. Again high rate of unemployment in the OECD countries devastated millions of the civilians of the poorer countries sweeping them deep down into acute poverty (Verick & Islam, 2010, p.v ). The absolute damage to the financial sector was prolific. The entire globe moved into a shock as the stock markets crashed and the giant financial institutions collapsed or went bankrupted. Even the governments in the wealthiest nations came up with rescue packages to save their financial systems from further worsening. It was soon felt that this global financial meltdown would affect the livelihoods of almost everyone around the world in an increasingly inter-connected world (Shah, 2010). The paper will highlight on various factors of global economic crisis of 2008-2009 with major focus on the US economy and how far the key actors of the American government are successful in curbing the evil effects of the crisis on the US economy. Primal causes and the US economy The world economic crisis of 2008- 2009 can be attributed mainly to the combination of world macroeconomic imbalances and serious weaknesses in the U.S. and the western financial structure. The US exports in 1975, exceeded the foreign imports by an amount of $12, 400 million. But that was the last trade surplus the United States saw in the 20th century. By 1987, the American trade deficit  swelled to $153,300 million. The deficit diminished a little bit in the next year but it reached to an optimum level in 1990 (History of the U.S. Trade Deficit, n.d.). Since the mid 1990s the global economic growth involved major macroeconomic imbalances between two different groups of countries including the then United States suffering from negative trade balances along with Great Britain on one hand and other Asian countries like China, South Korea, and Taiwan, which were referred as the trade surplus countries. The US saved less share of its GDP as compared to the trade surplus countries and focused more on the consumption. At the expense of their domestic demand, the trade surplus economies emphasized largely on the production of exportable and there was huge inflow of foreign exchange especially in terms of US dollars. The imbalances between the US and these countries became much more exposed. The US ran into huge negative trade balances as compared with the huge positive trade balances of these trade surplus countries. The surplus countries in turn, lent the US a large share of their accumulated foreign exchange reserves by majorly buying US treasury Bills. A reverse capital flow in the US market helped US to finance its trade deficits and at the same time checked the currencies of the trade surplus countries from rising in value against the US dollar. The inflow of capital lowered the interest rates and enhanced business investment boosting consumption and hence imports. The inflow of capital also exaggerated the financing on the investment in equities and properties. As a result an asset price boom generated with increased consumer wealth. This increase in wealth further stimulated the US consumption spending and imports and it was found that huge expenditure in the imports again surcharged the trade deficit of the US economy (Shane et al, n.d. p. 5). This can be understood from a simple comparative static analysis from the GDP identity. The GDP identity is as follows Where, Y= Aggregate income, GDP C= Consumption Expenditure I=Investment Expenditure G= Government Expenditure X= Expenditure on Exports M= Expenditure on Imports (X-M) = Trade Balance Now if (X-M)>0 then there is a trade surplus and if (X-M) Read More