Demand-side Policies and the Great Recession of 2008

Demand-side Policies and the Great Recession of 2008

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nA recession is a period in the economy that is characterized by deterioration in GDP for more than two successive quarters. This period is associated to the decline in the stock markets and housing market. Additionally, it involves the increase in the rate of unemployment. However, a depression is more severe as compared to a recession. If a recession continues for a long time, it often referred to as a depression (D’Arista, Vernengo, Epstein & Schlesinger, 2014). The great depression caused several challenges on the united state economy. It led to macroeconomic effects such as loss of jobs, decline in GDP and high inflation rate (Blanchard, 2012). The nations GDP was declining at 6 percent annually and the average number of jobs lost were approximately 750 000.

nThe Federal Reserve and Congress initiated both fiscal and monetary policies in order to avert the crisis. The Federal Reserve undertook a number of monetary policies designed to provide credit facilities to the financial institutions in order to provide liquidity (Blanchard, 2012). The Fed significantly lowered the interest rates in 2008; hence, it established a zero-interest-rate policy. In addition, it adopted massive quantitative easing in 2009. Further, in order to establish long-term interest rates it developed policies that purchased Treasury bonds and Fannie Mae and Freddie Mac mortgage-backed securities (MBS) (Braude, 2013). The fed also increased insurance deposit limits and assuring debt of bank hence stemming the financial turmoil.

nMoreover, in 2008, the Congress developed Troubled Asset Relief Policy (TARP). This policy was useful because the Treasury used it to inject the necessary capital into the banks nationally (Blanchard, 2012). The Congress and Treasury demanded the 19 biggest banks holding firms to perform comprehensive stress tests in 2009. This was designed to assess if the banks had adequate capital to withstand additional financial problems (D’Arista, Vernengo, Epstein & Schlesinger, 2014) . This initiative restored the public and investors confidence in the banking systems. In addition, fed introduced quantitative easing process in order to lower long-term interest rates. Initially, the government started buying agency bonds form the debt of Freddie Mac and Fannie Mae (Braude, 2013). Moreover, the government used quantitative easing that concentrated on the U.S government debt instead of MBS. Federal Open Market Committee used transparent communications that reduced the trend in interest rates of United States debts (Blanchard, 2012). In this respect, the fixed home mortgages fell to almost 4 percent.

nThe efforts to end the great recession involved fiscal measures. The government introduced checks in tax rebate in middle and lower income households in 2008 (Blanchard, 2012). Besides, the congress passed American Recovery and reinvestment act (ARRA) in early 2009 and other smaller stimulus program were passed into law. The government spent more than $ 1 trillion on fiscal stimulus programs. These were designed to terminate the Great recession and begin recovery (D’Arista, Vernengo, Epstein & Schlesinger, 2014). The United States government also involved rescuing the auto and housing industries. The great recession was caused by housing bust and bubble that caused rises in housing prices and increased foreclosure.

nThe Congress and policymakers of Fed developed efforts to break this cycle of events. In this regard, Fed developed efforts to lower the rate of mortgages and promote increase in limits of conforming loans. Moreover, Fed introduced a series of tax credits for homebuyers and it expanded the FHA lending rates (Blanchard, 2012). Further, it introduced the uses of funds from TARP in order to mitigate cases of foreclosure. TARP funds were very beneficial to domestic auto industry in 2008 because it enabled many auto industries such as Chrysler and GM to go through bankruptcy (D’Arista, Vernengo, Epstein & Schlesinger, 2014). Contrary, if the government did not provide financial assistance to these companies they could not have led to liquidate many operations with adverse outcomes overall economy.

nThe Bush administration, the government initiated countercyclical stabilization efforts. These efforts were aimed at purchasing the financial assets of many non-performing banks. However, the fiscal policy was executed by the Fed, which obtained the authority from the congress in order to purchase private sector liabilities (Braude, 2013). In this respect, the Treasury with the help of Federal Reserve purchased huge number of financial assets from private institutions. The congress approved a budget of $700 billion to conduct the purchase of asset-backed securities (D’Arista, Vernengo, Epstein & Schlesinger, 2014). The aim was to stabilize the balance sheets of the bank in order to get credit flowing again for investment financing. in addition, the government supplemented the Temporary Assistance to Needy Families (TANF) with emergency funds.

nIn conclusion, the effects of great recession could have been worse if monetary and fiscal policies were not implemented. Monetary policies help to reduce the interest rates that helped to avert the financial crisis in United States. This is because it helped to reduce high rate of inflation and increase the GDP (Blanchard, 2012). This enabled the Federal reserves to control the financial crisis. Secondly, the congress and Federal Reserve initiated ARRA and TARP that helped the government to purchase the financial assets from the balance sheet of troubled companies (D’Arista, Vernengo, Epstein & Schlesinger, 2014). The TARP program established demand for non-reproducible financial assets. The initiatives increases government demand to increase productions. In addition, it increased the rate of employment creation.

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nBlanchard, O. (2012). In the wake of the crisis (1st ed.). Cambridge, Mass.: MIT Press.

nBraude, J. (2013). The great recession (1st ed.). Cambridge, Mass.: MIT Press.

nD’Arista, J., Vernengo, M., Epstein, G., & Schlesinger, T. (2014). Monetary policy and the political economy of financial regulation (1st ed.). Cheltenham: Edward Elgar.