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).

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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 (C