Post it for PhD doctorate only.
Godbless_Always1
economic_assignment_part_2.docxThe recession that followed the financial crisis in 2008 was due in large part to a decrease in aggregate demand. As the credit markets tightened due to heightened fears brought upon by an almost total collapse of our financial system, jobs began to be lost and personal income dropped. The aggregate demand curve shifted to the left as demand for housing, luxury items, travel and leisure, and other normal goods decreased. This in turn caused a decrease in aggregate supply and a decrease in the price level. Immediately the government and the Federal Reserve increased their efforts to combat a depression. Efforts where made by the government and the Federal Reserve to stimulate spending. Stimulus in the form of increased government spending was done to spur extra spending by way of the multiplier effect. Moreover, the Federal Reserve began an aggressive bond buying program to spur spending by business and households by making credit very cheap.
Quantative easening is a tool that was used by the Federal Reserve in order to combat a failing economy. The process known as QE requires that the Federal Reserve enter into a bond buying program from banks on the magnitude of billions of dollars a month in order to provide liquidity to the banking system. Banks with greater liquidity have lower funding costs and as a result are encouraged to expand their lending activities to borrowers. In addition to encouraging lending and borrowing, the Federal Reserve through its bond buying program hopes to inflate price and in turn stimulate spending through what is known as the wealth effect. The act of quantitative easening to fine tune the economy is not an exact science and it requires good judgment and not always are the outcomes of quantitative easening exactly what the Federal Reserve hoped it would be. We can analyze the pros and cons of the Fed’s program on first on the level of job growth.
After the financial collapse of 2008 the Federal Reserve began taking measures to shore up the financial system first and as a result they began injecting liquidity into the system and then secondly they began lowering interest rates. Lowering interest rates was mainly directed and helping prices of housing to stabilize by stimulating demand indirectly through low mortgage rates. At the height of the financial crisis the interest rate on a 30 year fixed rate mortgage was 6.5% percent and now it currently stands at 4.5%. The effects on interest rates have been dramatic; furthermore, the effects on the housing market have been almost just as dramatic. In the aftermath of the financial crisis prices decreased 50% in some of the hardest hit markets and after three years housing prices are almost right back to where they started at the hike of the crisis. The median house price of a house in America was $249000 in 2007 and 292000 in 2008 and $204000 in 2014. Even though prices have stabilized we have yet to see the true buyers come back in to the market, which are first time home buyers. First time home buyers not investors or consumers buying a second home are the ones that should be participating in greater amounts in order to justify keeping rates this low. These low rates have also impacted the bank’s ability to make a profit. In a low interest rate environment banks find it difficult to make a profit because bank lending rates aren’t sufficiently high for them to make the profits that the industry standards demand. This in turn leads to a smaller number of banks that stand ready to compete and in turn less competition.
Next, job growth rate has also been one of the objectives of the Fed’s bond buying program. Part of the Federal Reserve’s goal is to reduce to maintain stable unemployment. With unemployment reaching a high of 10% in 2010, the Federal Reserve hoped that by stimulating investment that job growth would be increased and in turn the unemployment rate would decline. The unemployment rate has decreased to 5.5% and insurance claims have dropped at a steady pace since the peak of the unemployment rate in 2010. However, the same policy that is supposed to help those out of work to find a job has had the opposite effect on those who do not want a job and want to earn a return on their savings. This low interest rate environment has had some positive effects on unemployment rate but at the same time it has made it very difficult for those who are living of their savings to earn a living. Treasury bills and other safe investments that use to pay a significant return now pay so little that there is no return to be had and this has forced individuals who are in retirement to come out of retirement and to start working in a part time position. Others however have had to take their money and invested in real estate.
Work Cited
http://www.nber.org/papers/w17555.pdf
http://www.bankrate.com/finance/federal-reserve/financial-crisis-timeline.aspx
http://www.census.gov/const/uspriceann.pdf
