The Great Recession 2007- 2009 Essay Example

The great recession in American was triggered by the lack of the American government to regulate the financial institution in terms of credit lending. The banks engage in risky lending by offering subprime mortgage which led to the subprime mortgage crisis. The banks venture into lending more money though subprime mortgage since to them it was a good opportunity to make more profit because at that time the bank belief more on derivatives. Many investors including the small investors rush to taking this offer due to low interest attached to that type of loan. As a result, more and more houses sprung up. Sooner than later, the banks reset the interest of the loans much higher at the same time the prices of homes started declining following the principle of economics that the higher the supply of a commodity or service leads to a lower demand hence low price due to stiff competition among the suppliers. The fall in housing prices resulted in loan defaulters hence affecting the financial stability of the banks. The prevailing situation led to the housing bubble that contributes immensely to the great recession between December 2007 and June 2009. The great recession led to many negative impacts that were not limited to loss of jobs, unemployment, rising of poverty and job shortage (Mian, & Sufi, 2014).

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In order to curb and to reduce this prevailing recession, the government of the USA reacted to it in many ways, first of all, the federal reserves altered the monetary policies. Monetary policies are the tools use by the government to control the money circulation through the central bank. The government of USA through the central bank imposed regulations by reducing the lending interest rates by the commercial banks thus encouraging people to take loans which ultimately increases the money supply .with this monetary policy it helps to reduce the funds rate from 4.66% as at December to a lower ever rate of 0.13% as of December 2009.With the reduction of loan interest, many people could afford to take loan hence encouraging the development of small scale businesses which contributed positively to the rise of the economy of the USA. The high rate of unemployment which had risen to an alarming rate was reduced by the development of small scale traders which enabled people to be self-employed and ultimately generating income for the people. The government of the USA also introduce a compulsory deposit requirement for all the banks. In reaction to the prevailing economic situation, the government reduces the compulsory deposit requirements for banks, and this allows the banks to have a large pool of liquid money at their disposal. The increasing availability of liquid money with banks enhances the process of lending to small scale businesses thus improving the economy.

Fiscal policy is another tool which the government of the USA employs in order to correct the great recession. Fiscal policy is the microeconomic policy for adjusting the aggregate demand through the use of taxation or government spending. The government of the USA employs the expansionary fiscal policy as a solution to the adverse economic condition prevailing at that time. The government through this policy cuts the taxation on personal income and business revenue. The policy helped to increase the personal disposable income since the amount which could have been taxed in their income is left to increase their personal income, this means that the ability of people to demand goods and services was promoted. With the cut of business taxes, it encourages people to venture into business. The increasing growth of many small scale businesses means that jobs opportunities were created thus promoting personal income and ultimately poverty reduction which is one of the signals of a growing economy. The tax revenue decreased from 18.5 % in 2007 to 14.8%in 2009. The government further increase their purchases by increasing government spending on final good and services. The results of this are the creation and expansion of businesses which helps to reduce the rate of unemployment. The government spending rose from 18.5% of GDP in 2007 to 24.6% in 2009.

The government of Obama and its congress passed a bill of 830 billion dollars as an expansionary policy. This policy helps to increase the government spending hence expanding the supply of money to people.

In October 2008, the government of the USA enacted an act called the troubled asset relief program. This act allows the government to use 700 billion dollars to save the collapsing banks which were struggling with the financial crisis. Much of that money was given directly to those banks hence helping them to avoid collapsing. This act helps the banks and other financial institution to ensure that the banking services are continuously offered to people hence people could get loans to venture and start their own business and earn their income and furthermore to create jobs opportunities. The act also helps to reduce the restriction on advancing commercial and industrial loan by banks; this enables the business community to obtained loan and expands their businesses. The interest rates also dropped following the flow of money to the credit market (Hodges, & Lapsley, 2016).

American Recovery and Reinvestment Act were enacted in February 2009. This is the act that helps to reduce the taxation on peoples and business income and spending by the government that sum up to 787 billion dollars at the end of 2010.The act triggers additional unemployment insurance and social security benefits. The act further improved on infrastructure that goes a long way in promoting the industrial production to a tune of 3.7% larger in December 2009 than it was in June 2009.

In 2010 the relief and unemployment insurance reauthorization and job creation act were introduced. The act helps to reduce the payroll tax and expanded the unemployment insurance benefit thus greatly improving the people's disposable income. The after-tax income immensely grows after the introduction of this act, this extra money help to strengthen the economy. The results of this generally act, improve the financial market, labor market, and the economy at large.

Conclusion

The great recession has thought us many things especially in the state of economic projections and the signals of impending economic depression. The unfolding of the depression in the economy from 2007 to 2009 teaches us that as the amount of debt increased and the loan standard to be met reaches the lowest level, the rise in the housing prices will soon reduce. When a price of a commodity increases it attracts more attention especially to suppliers, the price may even go higher up to a maximum limit which it then burst when the market is flooded with many suppliers.

Another lesson learned from this recession is that the government's regulation over the financial institution like banks is very vital. If the government had full control to restrict the advancing of the prime mortgage before 2007, then this recession could have been prevented. Going forward, insurances, central banks, and large brokers would be empowered more in order to be able to come in and offset bad credit advances by banks.

Banks have also learned to improve their lending standards. The procedure of lending has now been reviewed by banks and make it more stringent hence the issue of cautious have seriously been taken into consideration by banks when giving out loans.

We also learned on some aspect of finances that, just because you qualify for a loan doesn't mean that you take a loan. What is very important before taking a loan is to analyze the economic situation and focused on the business you intend to start.

The great depression also teaches us that minimizing home expenditure is one of the key areas that can contribute to stabilizing the economy of a country. When the expenditure is minimized, it means that you increased saving. A higher saving is characterized by possible growth in businesses due to the availability of capital thus generating income for an individual.

References

Hodges, R., & Lapsley, I. (2016). A private sector failure, a public sector crisis-reflections on

The Great Recession. Financial Accountability & Management, 32(3), 265-280.

Mian, A., & Sufi, A. (2014). What explains the 2007-2009 drop employment? Econometrical, 82(6), 2197-2223.