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The United States Government's Responsibilities in Restarting the Economy

Essay by   •  August 13, 2012  •  Research Paper  •  3,017 Words (13 Pages)  •  1,769 Views

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The financial crisis of 2008-2009 has been compared to the Great Depression by many economists.

During the fall of 2008, the economic news was dominated by stories of millions

of Americans losing their homes to foreclosure, their jobs to layoffs, and their life

savings to dramatic stock market declines. Banks facing financial pressure tightened

lending and many closed for business. (Walker, 2010, p. 1)

The government has been working on finding out the causes of this crisis, and trying to find ways to jump start the economy. "Congress authorized the creation of a Financial Crisis Inquiry Commission 'to examine the causes, domestic and global, of the current financial and economic crisis in the United States.'" (111th Cong., 1st Sess., as cited by Fein, 2009, p. 3) The President, Congress, the Secretary of the Treasury and Chairman of the Federal Reserve all share responsibility in developing policies to help restart the economy and preventing another economic crisis in the future. People wonder if the policies that have been implemented will be enough and how long it will take to for the economy to recover.

It is vital to figure out the reasons why the economy has become so bad before decisions can be made about how to fix it. The causes of this economic crisis are many, although the consensus is that it started with reckless and unsustainable lending practices resulting from the deregulation and securitization of real estate mortgages in the United States. When the interest rates were down, the banks and other financial companies encourage people, some who were very high-risk to buy houses. These mortgages "were then securitized and sold to investors around the world." (Bardhan, Edelstein, & Kroll, 2009, p. iv)

During the time of low interest rates, the government encouraged people to buy homes, and gave incentives for them to do so in the form of tax credits. The government also helped high-risk people to buy homes through policies such as the U.S. Department of Housing and Urban Development (HUD). This department helps to provide low income families with the means for buying affordable homes. There were also FHA loans, which guarantees a mortgage for first time home buyers regardless of their credit history or income. Between the government and the financial institutions encouraging everyone to buy houses, regardless of their means to pay the loans back, it was a disaster waiting to happen.

Although the United States entering into the wars in Iraq and Afghanistan did not cause the economic crisis, it was a factor in starting the chain of events that ended up in the crisis.

The Costs of War project, which draws on research from numerous academics to tally the economic and human costs of the wars, has put this number at $1.3 trillion in appropriations to the Pentagon, or between $3.2 trillion and $4 trillion overall. (Levy, 2011, para. 3)

The wars not only cost the government trillions of dollars, but also caused oil prices to rise, which then made inflation rise. The rising oil prices made it more expensive for farmers to plant and harvest crops. The oil prices also made transportation more expensive. The Federal Reserve lowered interest rates to try to spur consumer demand and boost the economy after the oil prices started rising. This spurred more people into buying homes, but when the interest rates started to rise again, there were many people who could not afford the loans they had taken out to finance their homes.

During the same time, companies started having rising costs of production, and wanted to keep their profits high and/or make larger profits so that they would not feel the weight of inflation. Companies did many things to keep their profits high, none of which helped the common man to keep up with the huge debt that many had incurred while the interest rates were high. Many companies froze their employees wages, while others downsized, laying off millions of people. Still, others moved their production to countries with lower wages for employees. This caused an incredible burden on the economy. The unemployment rate soared, ranging from 7.8 in January 2009 to as high as 10.0 in October 2009. (BLS, 2012)

With the rising cost of inflation and so many people out of work or not making enough money to cover their enormous debts, people started losing their homes to foreclosure. This caused many financial organizations to suffer tremendous financial loss. President Bush seemed to downplay the extent of the financial crisis, which brought a lot of criticism from the media. (Holtzman, 2011) When the stock of American Insurance Group (AIG) fell 60 percent, The Federal Reserve secured an $85 billion line of credit to keep it from going bankrupt. (Holtzman, 2011)

A plan was created under the direction of Treasury Secretary Henry Paulson. One of the most significant portions of the proposal created the Troubled Asset Relief Program (TARP), which allowed the Department of Treasury to purchase up to $700 billion of troubled assets. (Walker, 2010, p. 1)

This proposal was meant to help spur the economy into recovery, but it did not pass Congress. When stocks fell drastically in Wall Street after Congress voted against the TARP proposal, the Emergency Economic Stabilization Act of 2008, which authorized the Secretary of Treasury to spend government money to help bail out private financial institutes, was passed and signed by President Bush in October. (Walker, 2010)

The slow response that President Bush seemed to take in response to the economy crashing, allowed the Democrats to take a lead in the Presidential race, and Barack Obama won the election. Once he was in office, President Obama "proposed an additional $825 billion package of spending programs and tax breaks to turn the economy around," which was immediately approved by Congress and the American Recovery and Reinvestment Act of 2009 was signed February 17. (Walker, 2010, p. 2)

Unfortunately, these acts that were passed under President Bush and President Obama only helped to save America's financial institutions. They have not really helped much to stimulate the economy, though, because the common man still cannot afford to put money into the economy. Unless the people of America can afford to spend money, the economy is still going to be bad. As the saying goes, it takes money to make money, and if people are not able to spend money, then the demand for products will be reduced, thus the supply will be reduced. This creates a spiral downturn because if companies do not need to produce a lot of product, then there is no need to hire people to work, so the unemployment



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