Great Recession Essay Example

Great Recession Essay Example


The federal government is responsible for stabilizing the economy through controlling market forces. Economic recession is a fall in the economy of a country usually characterized by a drop in stock market, escalated unemployment and decrease in housing market (Cynamon et al, 2012). Recession is a mild form of depression. Moreover, this drop is realized after six months through economic indicators such as GDP. Often, the federal leadership such as the president and Federal Reserve headsare usually accused for such economic decline. In addition high interest rates limits the consumers from investing since they are afraid of borrowing the money which slowly illicit recession.  Jenkins et al, (2012) adds that inflation leads to recession. Increase in inflation results to decrease in purchasing power since the goods or services that can be purchased with same amount of money decreases. Great Recession Essay Example

In times of inflation, the employees’ pay may be adjusted to keep up with the inflation or not. Lack of adjustment to the pay reduces the workers’ purchasing power resulting to recession. A good example of a recession is the Great Recession of 2008. Therefore, this paper will discuss this great recession and how the government employed the demand side policies to adjust.

The Great Recession

The misleading financial policies led to a significant number of people purchasing houses that were not within their financial capabilities due to the thought that the housing prices would continue to escalate. The sudden rise in housing caused panic to the banks and lenders who had mortgages as securities since they realized huge losses were in the offing. Bank to bank lending was incapacitated by the rise in housing since no bank wanted mortgages attached as collateral. The federal government had to intervene to prevent major financial institution from being bankrupt. Employment was slowly declining with 17000 jobs lost in January 2008 (Taylor et al, 2012). The business orders declined by 0.7% equated to 2007. GDP dropped by 4.2 percent in the last quarter and home prices dropped by 31%. The government and other nations instituted measures to recuperate the economy using fiscal and monetary policies. Great Recession Essay Example

Fiscal policies

The Fed had foreseen the drop in economic indicators long before financial lenders and bank systems would recognize. President Bush signed the Economic Stimulus Act of 2008 to help revive the economy. The act provided tax deduction for low income and middle income families of $300-1200. According to Cynamon et al, (2012) economic concept demonstrates that families with plenty savings or access to credit should align their consumption on lifetime income but not current year. Tax deductions such as those enacted by the act were more likely to be added to savings or pay debt by such families in turn preventing increase in aggregate demand. Great Recession Essay Example

The tax reduction helped the GDP rise slowly in the second quarter of 2008. Moreover, Fed created another credit mechanism called Term securities Lending Facility that enabled banks to exchange expensive mortgages for liquid money for a month. This boosted the investment banks and other non- banks institutions such as Bear Stearns. The Federal reverse was facilitating credit to financial sector through the credit mechanisms in order to bounce back to the economy to steady state.

Moreover, the president signed Emergency Economic Stabilisation Act of 2008 to enable purchase of mortgage backed securities. According to Taylor et al, (2012) Fed was provided with over 50 billion to purchase these assets through Troubled Asset Relief Program (TARP). These funds relived AIG and General Motors off loans that they were earlier unable to recover. In a nutshell, Fed encouraged money lending through offering loans by attaching assets as security to the public. The banks had ceased provision of long term loans to students and mortgages. This intervention by fed helped to stimulate the economy as much as possible. Great Recession Essay Example


Monetary policies

According to  Cynamon et al,(2012) the Fed raises both short and long term interest rates to avert inflation. More often than not, raising interest rates drive the economy to a recession. One of the actions taken by the Fed is to reduce interest rates once the recession cripples in. The Fed decreased funds rates from 4.24% to 3% from January 22nd to 30th. This decrease was meant to encourage consumer and business borrowing. This measure reportedly caused a change in GDP in the second quarter by 2%. However, on the 3rd quarter GDP began wavering which forced the Fed to lower the interest rate further to 0.25%. In addition the federal government initiated the ‘quantitative easing’ program which entails purchase of Treasury bond by the Fed in an attempt to reduce long term interest rates in order to encourage borrowing(Jenkins et al, 2012). Great Recession Essay Example


The Fiscal policy of cutting down the taxes was effective in reinstating the GDP. According to Erkel et al, (2016) survey conducted by Mathew and Joel stipulated that 25% of families planned to spend money following the tax reduction while 55% planned to save and pay for debts. However, the lowered rates of Federal Reserve failed to impact on the economy as was expected. Jenkins et al, (2012) Stipulate that due to lack of a procedure that details how long the rates should be lowered before the economy responds derailed economy growth.

Moreover, Taylor et al, (2012) argues that fiscal policies create jobs and opportunities from the future thus must be properly timed to avoid plunging of the economy back to recession. In a nutshell, the monetary policy of reducing interest rate failed to illicit a change in the economy which facilitated institution of quantitative easing. This invalid tool of reducinginterest rate and rising ratesduring inflation failed to restore economic growth (Jerkins et al, 2012). Nevertheless,the demand side policies greatly succeeded in restoring the economy growth.Great Recession Essay Example

Reference list

Cynamon, B. Z., Fazzari, S., &Setterfield, M. (Eds.). (2012). After the great recession: the struggle for economic recovery and growth. Cambridge University Press.


ERKEL, P. F., & MEER, T. W. (2016). Macroeconomic performance, political trust and the Great Recession: A multilevel analysis of the effects of within‐country fluctuations in macroeconomic performance on political trust in 15 EU countries, 1999–2011. European Journal of Political Research, 55(1), 177-197.


Jenkins, S. P., Brandolini, A., Micklewright, J., & Nolan, B. (Eds.). (2012). The great recession and the distribution of household income. OUP Oxford.


Taylor, L., Proano, C. R., de Carvalho, L., & Barbosa, N. (2012).Fiscal deficits, economic growth and government debt in the USA.Cambridge Journal of Economics, 36(1), 189-204. Great Recession Essay Example

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