Macroeconomic Policies during the Recession of 2008-2009

• Renyuan Feng

An Assessment of Macroeconomic Policies during the Great Recession of 2008-2009

Brief Introduction

From 2008-2009, US economy suffered the severe recession from the impact of the global financial crisis. From 1990s, United States has experienced the huge amount of the saving inflows from the other emerging markets (Bernanke, 2009). However, the financial institutions invest these savings with the poor way to develop the sub-prime mortgage and push the real estate price increasing. The sub-prime mortgage loans were provided to the people with poor credit score as the no income, no job and no asset groups. Meanwhile, these bad loans were securitized in the financial market and traded as the financial instruments to provide numerous profits for the financial institutions and Wall Street bankers (Thomas, Hennessey, & Holtz-Eakin, 2011). The low interest rate and the increase of housing price had provided new opportunities for these foreign saving inflows. The burst of housing bubble has led the high proportion of defaults on subprime mortgage. With the fall of largest financial institution, the whole financial system suffered the damage. Later, this financial crisis has become contagious into the global scale and finally created one of the most serious financial chaoses in the beginning of the new century. During these months, US economy has experienced the severe negative influences as the real GDP fell at a 6% annual rate and the employment positions have been reduced in the large amount every month. The usage of confusing financial instruments as credit-default swaps and collateralized debt obligations in the financial market has been blamed as one of the significant reasons for the crisis (Weisberg, 2010). Meanwhile, the other main causes for this Great Recession could be included as the international global imbalances, the low interest rate for the monetary policy, the lack of regulation for the new financial instruments and conflicts of interest in the financial rating agencies (Bernanke, 2009).

Fiscal Policies in Action

To deal with this economic recession, US government has passed the American Recovery and Reinvestment Act in 2009. The act aims to develop more new employment and maintain current ones, to stimulate the economy and invest the economic growth and to improve the transparency of government spending. At the same time, the government would provide around $787 billion financial support for the tax cuts, funding for unemployment benefits and funding for grants and loans (Recovery.gov, 2009). The government requires the usages of Recovery funds need to be reported every year to maintain its transparency. The government would also provide financial support to the local school districts. All these actions would help the country’s economy to leave the negative influence from financial crisis. However, the strategies which focuses on the government spending and taxes cut are still be discussed by the economic scholars because the effect of them are hard to be observed and examined(Wilson, 2012).

Monetary Policies in Action

One of the most significant monetary policies is that the Federal Reserve to support the economy is that usage of quantitative easing. It is the approach that the central bank uses its printing machines to make more notes to buy the assets (Reddy, 2010). This way could effectively decline the notes’ yield and the interest rates of the debt market. This strategy could help the homeowners to refinance their loans because the borrowing costs have been reduced. The investors also are guided into the share markets and bond markets by the market to increase the value of these securities (Reddy, 2010). It could help the US exporters because it weakens the US dollar. The whole process could push the asset prices and inflation expectations, reduce the exchange rate and real interest rates. From 2008 to 2010, the Federal Reserve has bought about $1.7 trillion of Treasury and asset-backed securities to push the economy away from the recession. The economists have predicted that this action could reduce 0.5% of the long term Treasury yields and also the rates in the private credit markets. It also helps the asset market, especially the real estate market to increase the prices. This activity could have the possibility to build up another round of the financial bubble because of the higher yields in riskier assets. The quantitative easing could effectively reduce the value of the US dollar and start the currency war. However, it increases the risks of pushing up the prices of commodities and increasing the inflations. The effects and risks of this policy are still the controversial topics.

Have the Fiscal Policies Worked?

The Fiscal Policy as ARRA actually helps the economy recovery for months. With the implementation of this act, the economy performance was significantly influenced. The real GDP showed the stable growth from the autumn of 2009. The private payroll employment also grew in about 2.2 million from 2010 to 2011(Council of Economic Advisers, 2011). Some measures have the fiscal stimulus has the effect on the increasing level of GDP from 2011. The strong growth of GDP has begun from the third quarter of 2009 and remained the good trend for the economy in the following months. The result is similar with other results from different analysts. Until 2011, the estimation from CEA showed the employment has been increased between 2.2 to 4.2 million (Council of Economic Advisers, 2011). In 2008 and 2009, the employment market has suffered the serious decline because of the impact from the recession. The fiscal policy of ARRA has raised the concerns of the Federal Government into the job market. From the first quarter of 2011, the payroll employment has kept the steady increase in the following months. This result was the significant increase to help more people to work and increase their income. The Federal government has effectively cut its spending and tax in the amount of $697 billion which has followed the estimation of the act. The huge amount of the tax cuts would still continue in the next year plans. The individual tax cuts and the state fiscal relief which occupied the large proportion in the government spending have been paid more attention to deal with. The public investment spending on infrastructure and clean energy have been increased from only $7 billion in 2009 to $182 billion in 2011. It is because this act aims to develop the long-term strategies for the economy. The demands of improving infrastructure and clean energy could effectively increase the competitiveness for the country’s future economic development. These results have been compared with the other results from different models (Council of Economic Advisers, 2011). There were no significant differences among them. Additionally, the study from Moody’s Analytics model also supported that the current fiscal policies have contributed a lot in to the increase of GDP, jobs and inflation (Blinder &Zandi, 2010). After examining the results in different scenario, the study showed that the financial stimulus played an important role in the economic performance.

Have the Monetary Policies Worked?

The Monetary Policy actually failed to stimulate the economy. First of all, after many rounds of quantitative easing activities, the economy still remains weak. The national economy is in the low-growth environment with the poor GDP performance. The GDP in 2010 was just 2.9% which was the result with both contributions from fiscal policies and monetary policies. Meanwhile, the performance in employment market was also bad with the high unemployment rate of 9.2%. The financial support with more than $2.1 million in the job market actually worked nothing in theses months. All these bad performance have added more pressure to the Federal Reserve. Even though the value of US dollar has been decreased in the global market, the export market could not contribute sufficiently to support the economy. US government was also blamed to control its exchange rate in the global exchange market. On the other hand, the monetary policy has stimulated the creation of the new asset bubble. The impact for the huge amount of notes in the financial system has shown in the economic performance. The inflation faced the huge challenge in the increasing prices of commodities. The S&P has increased twice than last year at 8%. Residents have to face the increase in the commodity. However, the government believed this inflation was still in control and with few risks. The IPO has become the next bubble in the financial market which was the result of commodity boom and asset bubble (Groth & Randazzo, 2011). This monetary policy has driven the US Federal Government into one wired situation with the mix of stagnant wages, high unemployment, high inflation and the asset bubble. The government believed that there were no threats from the inflation and asset bubbles. However, the capacity for the government to identify the potential risks and the effect of the current policy were still doubted by the economists. The government policy influenced the indicators for government to adjust its policies has become one of the paradox in the decision making process. All these results could show the failure of quantitative easing policy.

Conclusion

Currently, US Federal Government has implemented several fiscal and monetary policies to help the economy recover from the chaos of global financial crisis. With the combination of government spending cuts, tax cuts and quantitative easing, the US economy has shown increasing trend. With the comparison from different studies, the fiscal policies have successfully improved the performance of the economy. The government should continue the sustainability of economic development and maintain the concentration into the employment market. On the other hand, the monetary policy as quantitative easing did not show the significant effect on the economy. The increasing inflation and the potential new asset bubbles have brought more challenges to the Federal Government. In this aspect, the government must pay more attention into these two areas to avoid increasing likelihood for the other crisis. The government must adjust both monetary and fiscal policies to achieve the goal.

References

Bernanke, B, S. (2009). Four Questions about the Financial Crisis. Retrieved from http://www.federalreserve.gov/newsevents/speech/bernanke20090414a.html

Blinder,A, S., & Zandi, M. (2010). How the Great Recession Was Brought to an End. Retrieved from http://www.princeton.edu/blinder/End-of-Great-Recession.pdf

Council of Economic Advisers. (2011). The Economic Impact of The American Recovery and Reinvestment Act of 2009. Retrieved from http://www.whitehouse.gov/sites/default/files/cea_7th_arra_report.pdf

Groth, J., & Randazzo, A. (2011). The Failure of Quantitative Easing. Retrieved from http://reason.com/archives/2011/07/15/the-failure-of-quantitative-eaRecovery.gov. (2009). The Recovery Act. Retrieved from http://www.recovery.gov/About/Pages/The_Act.aspx

Reddy, S. (2010). How It Works; When It Doesn’t Retrieved from http://online.wsj.com/article/SB10001424052748704506404575592722702012904.html

Thomas, B., Hennessey,K., & Holtz-Eakin, D. (2011). What Caused the Financial Crisis? Retrieved from http://online.wsj.com/article/SB10001424052748704698004576104500524998280.html

Weisberg, J. (2010). What Caused the Economic Crisis. Retrieved from http://www.slate.com/articles/news_and_politics/the_big_idea/2010/01/what_caused_the_economic_crisis.html

Wilson, D, J. (2012). Government Spending: An Economic Boost? Retrieved from http://www.frbsf.org/publications/economics/letter/2012/el2012-04.html