Causes of the recession in the United States and alleviation programs
According to the National Bureau of Economic Research, the American economy slipped into the recession in December of 2007 (Chris Isidore). But the announcement did not come as a surprise to many Americans , as they had believed that the American economy was on its way down the road to a recession. According to the Bureau, one of the key factors that led to the recession in the American economy was the downturn of the labor market for 2008. Businesses cut their payrolls by more than a million jobs for the first 10 months of 2008. it was also expected that the American labor force will lose another 325,000 come November (Isidore).
But the Economic Research Bureau did not categorically state what specific factors contributed to the American recession (Isidore). But the downturn in the housing market was one of the widely held reasons that the American economy nose dived into a recessionary mode. The breakdown of the housing markets boom cycle was begun with the decrease in the prices of the prices for new housing units by the third quarter in 2006 (Benjamin Powell 1). in the Case-Shiller Index, the average for prices nationwide dipped by more than 30 from their high levels in 2006 through 2009. In other markets, the dive was more severe (Powell 1).
Phoenix and Las Vegas took hits in the prices of the houses in their locales, decreasing to more than half of their value. Housing markets in California and Florida have experienced decreases in their markets by more than 40 percent. The decrease in the price of residences led to sudden upturn in the foreclosures of the houses owners. The financial indicator Dow Jones slid to less than 7,000 points in 2009 from their 14,000 level in late 2006. (Powell 1).
The dive in the prices of houses from their highest levels took a significant share in the home building and home sales sectors. As earlier stated, the decrease in the prices of homes caused the increase in the foreclosures in the mortgage market, which led to the losses for banking institutions and the tightening of credit in the market (Isidore). The housing bubble in the United States was created by the lax monetary program in the United States. This expansive monetary policy led to the birth of the American housing bubble (Powell 1).
After the collapse of the dot.com bubble in the 90s and the 911 terrorist attacks, the Federal Reserve decreased the rate of funds to 2 percent from 6 percent and further lowered the number to just one percent in 2004. When the Fed raised the rate to 5 percent, the bubble in the housing market imploded (Powell 1). The link between the implosion of the housing market in the United States is seen as the main catalyst in the collapse of the American economy and the huge amount of debts used to fuel the growth of the bubble (Thomas Palley 2). But the question that can be posed in the scenario is if the economy required the presence of a bubble to continue the growth pattern of the economy
If the context for the scenario is the need for the bubble, then the cause of the crisis is the macroeconomic framework that underpins the American economy. The state of the macroeconomic framework in operation at the time of the crisis will well lead to a discovery of the cause, as these principles have been in operation for the past quarter of a century. The first factor is the growth model being used by the United States and the pattern of income allocation and the creation of demand in the parameters of the American economy, the second addresses the American frame of foreign trade arrangements and the construction of the global trade relations of the United States in the confines of the global economic scheme (Palley 2).
The forces in the macroeconomic level have contributed, albeit slowly, to the creation of the unstable economic environment. The instability can be seen in the bubbles in the economy, the increasing American load of debt, increasing trade deficits and boom and bust business cycles. But economic managers and researchers have willfully ignored the signs that have carried the American economy to the brink of ruin. These signs and actions have largely contributed to the collapse of the American economy (Palley 3).
The crash of the sub prime housing market in 2007 is considered as the main trigger of the collapse, which was exacerbated by the flawed decision to allow the demise of Lehman Brothers (Palley 3). The contagion of the American sub prime crisis spread across the Atlantic. This provoked the insertion of significant amounts of liquidity into the market by the European Central Bank and the Federal Reserve. It is seen that since the primary trigger of the problem, the collapse of the American housing market, will not be resolved in the near future, the problem of the American recession is seen to last for some time (Koichi Haji 1).
Many observers state that the best case in the current crisis is that the recession and its effects will bottom out by the second quarter of 2009. But even in that best case scenario, the current recession will be chronicled as the longest in the history of the United States since the Great Depression in the 1930s. In the opinion of Argus Research director of economic research Rich Yamarone, the good news in the entire affair is that the government has begun to initiate policies designed to address the current crisis. Just recently, representatives on Capitol Hill passed a tax rebate measure in the amount of 170 billion, designed to resuscitate the ailing economy (Isidore).
But the problem is not the amount but in the treatment of the problem. To the legislators, the problem seems to be solved by increasing the demand in the economy. Rather, it is the mismatching of the consumers preferences and the supply that the economy can deliver. Recovery will come when the preferences of the consumers and the supply capacity of the market is made to equate with one another. In the case of the housing bubble, money must be allocated to industries that can provide better satisfaction to the consumers rather than pump more money into industries that led to the collapse, hoping that these will placate the effects of the crisis on the industry (Powell 3).
The response of the American leadership seems to mimic the experience of Japan in its own housing market collapse. The government had initiated massive bailout programs and cut interest rates and a massive stimulus program was created. In like fashion, the American government gave out huge amounts of financial resources to companies with questionable credit ratings, such as Bear Stearns, J.P. Morgan and Fannie Mae and Freddie Mac. The process of letting the market determine the status of the institutions delayed the restructuring of the banks and the allowing of the market forces to take its course as to the final state of the financial institutions (Powell 4).
The Federal government, in particular the United States Treasury, Congress and the Federal Reserve have all acknowledged the severity of the crisis, and have begun the process of inserting trillions of dollars with the purpose of abetting the effects of the economy. This includes the 700 billion bail out program for Wall Street companies and other financial institutions and billions more to large American companies and borrowers. But in the opinion of Economic Research Institute managing director Lakshman Achuthan, the final cure for the recession is just letting the event run it course until it exhausts itself (Isidore).