Macroeconomic Policy Lessons From the Financial Crisis Paper Example

1. Three Lessons for Monetary Policy from the Panic of 2008

James Bullard wrote this article with the aim of expressing the change in the economic sector mostly in the United States. There was an economic crisis where the prices of commodities changed with time. Due to economic contraction both the United States and the whole world experienced a total financial turmoil, most firms in the fourth quarter of 2008 became bankrupt with major economic contracts worldwide. The monetary crisis, according to Bullard was divided into three parts, the first one is the Lender of Last Resort on a Grand Scale. Liquidity programs had the aim of intentionally setting expectations that were needed for future intervention (Bullard, 2010). Due to the crisis, there was an increase in the lending activities to avoid bankruptcy. Liquidity programs are aimed to improve the market functionality though currently with the efficiency of markets the programs are becoming irrelevant. The issue of lending could have been minimal if they were no financial crisis.

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Secondly, he talked about Monetary Policy by different means; it was also a lesson learned from the 2008 financial crisis. In different situations policies could be made to ease the situation. Bullard said that the fed could conduct policy stabilization in cases where the policy rates are at nil. (Bullard, 2010). Different programs were started which became more successful especially after encountering the zero bound. The programs were inclusive of the asset purchase program which through the policy rate could not be done. The latest information about the economic set the basics of conducting quantitative policy, for example in case of a poor economic state the FOMC could decide to purchase more assets. FOMC aimed to make a $ 1.725 total purchase which was through an asset purchase program that was initiated in January 2009 after lowering its policy in December 2008 to near zero (Bullard, 2010). According to Bullard, it was the responsibility of FOMC to allow the activity of monetary policy during near zero periods by adjusting the asset purchase program.

The third lesson according to Bullard is the Monetary Policy and Asset Pricing. Over the past 15 years, the issue of asset prices has been deeply debated; it is said to be a serious monetary policy issue. According to Bullard (2009), the major shortcoming is the inability to point out the cons of a precious policy especially if it gives conventional ideas on its aims and objectives. Inflation becomes very low and more stable during the 1990s tech bubble and the 2000s housing bubbles (Bullard, 2010). The unemployment rate was 4.4 percent in 2007 and 3.8 percent in 2000 which was low. In Bullard's view, there was a need for better bubbles. (Bullard, 2010).

2. Getting Back on Track: Macroeconomic Policy Lessons from the Financial Crisis

In the financial crisis, monetary and fiscal policy plays a crucial role. Lessons are drawn for future macroeconomic policy (Taylor, 2010). The volatility period was in the 1950s which went through to the 1970s. Two decades followed which were less volatile, and they were low inflation, developments and recessions which was constant to the following fiscal crisis. The 'Great Deviation' was the reason the Great Moderation ended. They were an economic change from better to worse after the deviation of the economic policy. The policy changed to less likely, fewer rules and more interventionist. In 2001, the interest rates were expected to go down, and they fell to 2 percent then later to 1 percent. Capital stated flowing from abroad which may have resulted in more problems.

The government undertook interventions though they had no significant impact. According to john liquidity may have been the most affected and the policies never addressed the issue, among the solutions made was the increase in the supply of liquidity through TAF where some foreign central banks joined in. Later spread of LIBOR-OIS declined a bit after the amenities were ratified in the last month of 2007 (Taylor, 2010). Later the impact rose again and remained high. Balancing of sheet problem at financial institutions like banks were not addressed by the policy interventions which prolonged the financial crisis. On the fiscal side, they were the occurrence of a fiscal action referred to as Discretionary Fiscal Action. It was in the fiscal stimulus of 2008. The primary aim of the policy was to give temporary tax rebates which were to help recipients to use the money to help the economy rise. It was derived from policies that 20 years ago were working well. In the early Monday, September 15 the Lehman bankruptcy occurred, Lehman and its creditors were not bailed after a decision that was made over the weekend. On September 15 LIBOR-OIS slightly increased and later in the week it fluctuated (Taylor, 2010). During the weeks that followed the market turmoil worsened. The government through the TARP warned people of there was a systematic risk and also the coming of the Great Depression. As a result, the economy was significantly affected since people were shocked and worried. The change and shock spread internationally affecting different major stock markets. During the panic period which was in the late September into October resulted in new policies and programs. The feds had a program to assist the mutual funds for the market and the commercial market. After the end of the panic period, interventions were introduced by the feds, one of the significant programs was to acquire mortgage and the TALF (Term assets Backed Securities Loan Facility). The more massive recording was $ 1.25 trillion which was the MBS, while on the other hand, the TALF was not that fast. To reserve balances, the Feds were responsible for MBS portfolio reduction due to the current situation. According to John, the Macroeconomics policy gets back on good order, to avoid more depts. This increases wasteful discretionary stimulus packages which have a low impact on the GDP. Therefore, the monetary policy enhances the efficiency in achieving among the four essential characteristics which were in the short-term interest rates. Adjustment of supply of money to hit the desired short-term third the adjustment of rates interests rates depending on the economic condition and to ensure its total independence focusing on its primary aim of controlling inflation and enhancing the stability of macroeconomics.

3. Questions about Fiscal Policy: Implications from the Financial Crisis of 2008-2009

The crisis was due to the credit crisis people had difficulties in obtaining loans, and as a result, they were insufficient aggregate demand. The monetary theory can prop up aggregated demand, and as a result, they implemented their stimulus plan. Through the use of macroeconomics model, they obtained numbers of government purchase multiplier and tax multiplier. The activities of the government from its spending to its borrowing will possibly affect taxation in the future. The author asks several questions among them being the way the government can spend more money wisely. Time is wasted to plan for some developments, for instance, more months are spent designing and locating a place to build a school. The second question is the size of the multipliers (Mankiw, 2010). According to the Keynesian model, the government purchase is more significant compared to the tax multipliers. After a research in the Obamas government, it was concluded that the tax multiplier was three which was three times the size of what was assumed in the Obamas administration with their policy stimulations. Research has tried to identify different government spending and identify the exogenous movements. The rate of taxes affects the economy in different ways; first, the incentives are primarily affected, there also changes in corporate income tax, marginal rates of tax, and personal income taxes. Incentives should be created for businesses to hire new workers; this is due to the high unemployment rates. On the industries part, they should be rewarded for hires they make without tax incentives (Mankiw, 2010). For the new firms, it is hard to enforce tax credit for new employment due to disagreements with the already existing firms. When considering the short-term run fiscal, more focus should be emphasized on end fiscal image since once the economy begins to raise the long-term fiscal image is maintained and improved as a result of flow in tax revenue.

Similarities and Differences

All three articles are similar regarding economic situations. They are concerned about the current financial sector position and its effects on the global economy. The economic crisis caused fluctuations of commodities to the panic due to the government warning. It resulted in bankruptcy and fluctuations in the stock markets all over the globe, and finally the government activities, which includes taxation and development which generally affects the economy. They all share the dependency characteristics; economy depends on different activities and policies (Mankiw, 2010). One policy can result in a big change in the economy. For example, James talks of how world war affected the economy, John to talks of how the great moderation affected the economy by impacting fear in people and lastly how the government actions impact the businesses. Policies are common, in different economic situations policies are enhanced to see success financially though not all policies result to success some deteriorate the economy. On policy making and enhancement of policy, the three authors conclude that policies should be made considering the economic situations. They agree that some of the policies made resulted in the poor economy and they needed to be changed, James on the monetary policy says policies should be made to make situations better.

Conclusion

Therefore, the articles are different in one way or the other, James talks of how the financial crisis resulted in changes in the economic positions. The main cause of poor economic status was due to the crisis. On the other hand John says the government during the volatile period announced the risk of great moderation which was the result of fear that affected the economic stability not only in the united states but also all over the globe lastly Gregory focuses on the effects created by the government operations to the economy, from taxes to its expenses. Though the main topic is economic changes and economic policies, the three authors have used different perspectives.

References

Bullard, J. (2010). Three lessons for monetary policy from the panic of 2008. Federal Reserve Bank of St. Louis Review, 92(3), 155-63.

Mankiw, N. G. (2010). Questions about fiscal policy: Implications from the financial crisis of 2008-2009. Federal Reserve Bank of St. Louis Review, 92(May/June 2010).

Taylor, J. B. (2010). Getting back on track: macroeconomic policy lessons from the financial crisis. Federal Reserve Bank of St. Louis Review, 92(3), 165-176.