Power Point Presentation (American Government)

profileBryanCridell
CRIDELL-THEGREATRECESSIONOF2008.docx

Running head: THE GREAT RECESSION OF 2008 1

THE GREAT RECESSION OF 2008 7

The Great Recession of 2008

Bryan Cridell

Instructor: Dr. John Theodore

Macroeconomics

07/24/2022

Introduction

A recession is a decline in economic activity or a delay in economic events. Typically, a recession is caused by a significant decline in expenditures. Therefore, the decrease is significant in industrial industries throughout the country, as evidenced by the actual GDP, participation, real income, and company production. The Great Depression was characterized by a significant reduction in economic activities. The economic downturn started when the American real estate market went from flourishing to bust, and significant amounts of mortgage-backed assets and derivatives lost a huge value (Rich, 2018). Recession is a typical, although unfavourable, phase in the business cycle. Economic recessions are caused by weak federal administration, the Federal Reserve, the president, or occasionally the backlash of the entire governing regime. Rising inflation, which is a sudden rise in prices for products and services, is one factor that may contribute to an economic slump (Sumner, 2021). Depressions are defined by a rapid pace of corporate failures, frequent bank disappointments, negative or poor growth in new product development, and elevated unemployment. Even if economic distress brought on by downturns is only temporary, it nonetheless has the potential to have a significant impact that can alter an economy.

The Great Recession

The Great Recession of 2007-2008 was brought by the United States financial sector’s unreasonable and inadequate lending methods. As a consequences, the government was forced to step in and provide huge financial institutions with a bailout that was believed to be worth 700 billion dollars. This was done because banks were even frightened to loan to each other during this time (Rich, 2018). The state of the economy was worsening, and unemployment was beginning to set in at an increasing speed. As a consequence, the national government was forced to adopt and put into practice the fiscal and monetary measures of macroeconomics in order to facilitate the restoration of their deteriorating economy.

Fiscal Policies

Fiscal policy refers to measures implemented by regimes to calm the economy, particularly by changing the allotments and levels of taxes and public spending. The foundation of fiscal policy is the belief that economic recessions are caused by a deficit in company investment and consumer expenditure (Taylor, 2018). Keynes believed that governments would manage economic performance and the business cycle in order to maintain economic stability. This can be accomplished by adjusting the policies governing taxes and spending in order to fill in the gaps left by the isolated sector. Keynes' ideas were extremely convincing and were a driving force behind the new arrangement that was struck in the United States, which resulted in significant spending on various social welfare programs and public works projects. When there is a drop in expenditure in the private sector, the government may increase its spending in order to boost overall demand. The Federal Reserve gradually raised interest rates in order to ensure stable inflation rates throughout the economy (Sumner, 2021). As a kind of retaliation, rising market interest rates led to a reduction in the volume of innovative credit flowing into the real estate market through the channels of conventional banking networks. Perhaps even more significantly, the interest rates on current mortgages that could be modified and on other unusual forms of credit started to rearrange at far more sophisticated rates than most borrowers had anticipated. The result was a bubble in the housing market. In order to prevent the economy from collapsing during the recession that began in 2008, the United States followed a carefully crafted fiscal policy (Islam & Verick, 2011). The most major benefit of implementing this strategy is the potential to stabilize the economy during a recession through the employment of fiscal policy.

The United States government pursued an "expansive fiscal policy" throughout the Great Depression. Thus, in order to stimulate economic growth and raise aggregate demand, the government distributed tax stimulus refunds. According to the rationale, when people pay less in taxes, they have more money to invest or consume, which increases demand. The desire prompts businesses to hire more people, reduce unemployment, and engage in more intense labour market competition. This in turn helps to raise salaries and give customers more money to save and spend. It's a positive feedback loop or deserving cycle. Additionally, the government increased spending to achieve economic expansion. The administration prioritized the construction of extra infrastructure, which resulted in a rise in employment while simultaneously boosting economic expansion and demand. As a result, fiscal policy is a critical component of US economics (Gagnon, 2016). During the economic downturn that began in 2008, both the legislative and executive branches of government were responsible for formulating fiscal policy and employing it to influence the state of the nation's economy through the manipulation of expenditure and income levels. The government utilized its powers to generate aggregate demand by increasing expenditures and promoting an atmosphere that was easy on cash. This encouraged the economy by creating occupations, which ultimately led to an increase in affluence. Because of this, fiscal policy was successfully utilized both after the great recession and while it was occurring.

Monetary Policy

Monetary policy is used to either slow or stimulate a nation's economy, and the Federal Reserve is in charge of it with the ultimate aim of implementing a simple cash atmosphere. In reaction to the severe economic downturn that the United States experienced, the Federal Reserve implemented some strong monetary policies. The actions of the federal government are largely credited with preventing much greater harm to the international economy. Nevertheless, it is criticized because it lengthened the time it took for the economy as a whole to recover from its effects and because it laid the groundwork for future economic downturns. The United States central bank is the primary agency responsible for addressing recessions. It is also one of numerous institutions entrusted with regulating banks and ensuring the stability of the monetary system. Additionally, it is one of numerous entities that are tasked with the responsibility of overseeing banks and ensuring the consistency of the monetary system. Therefore, during 2008 recession and years after that, the Federal Reserve was in the forefront of fighting interconnected issues inside the banking system and the actual economy (Stavrakeva & Tang, 2019). This trend continued for several years after 2008. In its fight against the calamity, the federal government utilized a wide range of tools, including the standard manoeuvres of monetary policy as well as a number of novel courses of action.

The federal government changed the money supply by adjusting the discount ratio, which tends to be the instrument that consistently draws attention from the media as well as speculation and projections from economists. The federal government engaged in open market operations, which influenced the availability of cash by selling and purchasing securities issued by the United States Treasury. Because of this, the architects of monetary policy responded quickly to the crisis in 2008 when it occurred. The interest rate on the national fund was lowered by the Federal Reserve shortly after the beginning of the Great Recession, which coincided with a significant drop in both employment and GDP. Near the end of 2008, the downturn got even worse as a significant monetary policy coffers rate shortage became apparent. As a kind of retaliation, the Federal Reserve increased the use of balance sheet methods to reduce interest rates and increase the availability of credit to firms and people. As a result, the effect of the monetary policy in 2008 resulted in lower interest rates, which made it easier for businesses to expand their operations and for consumers to spend money, all of which stimulated economic growth.

Conclusion

In summary, the use of demand-side tactics during the great depression of 2008 proved to be helpful in reviving economic growth and bringing the unemployment rate down. The United States federal government directed the economy through the employment of monetary policy and fiscal policy. They have the potential to stimulate the economy or slow it down, depending on how they are used, and either way, they might have analogous results. The fiscal policy affected individual spending, exchange rates, asset expenditure, interest rates, and deficit levels. The United States of America sought a resolution in the middle ground, incorporating aspects of both regulations in order to handle economic hitches. This is despite the fact that every policy range has its own unique variations.

By lowering interest rates, the monetary strategy hopes to boost economic growth as well as aggregate demand. This is the policy's primary purpose. When interest rates are reduced, it implies that the cost of borrowing money is lower. Individuals will spend more money and invest more when it is easier for them to borrow money, which will lead to more job possibilities. During a recession, aggregate demand declines. Fewer goods and services are purchased by households, businesses, governments, and international markets. The decrease in yield produced contributes to a rise in the unemployment rate. As a result of declining revenues, businesses are compelled to cut their operating expenses.

The application of monetary and fiscal policy during the Great Recession of 2008 was highly effective in decreasing unemployment and reviving economic growth. Because of these measures, additional cash was injected into the economy of the United States, which had the effect of reducing borrowing rates, which in turn spurred corporate expansion and consumer spending, so fostering economic growth. The expansion of the economy resulted in the creation of additional jobs and contributed to a reduction in the level of unemployment across the nation. As a result, demand-side methods were successfully implemented during and after the great recession of 2008.

References

Gagnon, J. E. (2016). Quantitative Easing: An Underappreciated Success. Policy Brief 16-4. Washington, DC: Petersen Institute for International Economics.

Islam, I., & Verick, S. (2011). The great recession of 2008–09: Causes, consequences and policy responses. In  From the great recession to labour market recovery (pp. 19-52). Palgrave Macmillan, London.

Rich, R. (2018). The great recession: December 2007–June 2009.  Federal Reserve History.

Stavrakeva, V., & Tang, J. (2019). The dollar during the great recession: US monetary policy signaling and the flight to safety.

Sumner, S. (2021). Ten lessons from the economic crisis of 2008. Retrieved from https://www.cato.org/cato-journal/spring/summer-2019/ten-lessons-economic-crisis-2008

Taylor, J. B. (2018). Fiscal stimulus programs during the great recession.  Economics working paper18117.