HOUSE BUBBLES
The fiscal policies have been used the previous and the present government the United States of America to achieve economic stability in the country. Furthermore, when aggregate demand for goods and services increases the occurrence of inflations in imminent; the current government needs to formulate both fiscal and monetary policies to control the economy. Consequently, monetary and fiscal policies are the essential tools the government uses to ensure the national economy is at equilibrium: the unemployment rate, interest rate, and inflation rate are at reasonable prices. Principally, all the fiscal and monetary policies have been used to solve the housing bubble problem in the United States of America.
The Fiscal Policies
The presidency in the United States of America under the administration of Donald Trump has passed fiscal legislation to stimulate economic growth. Furthermore, the Republican Party strength in the representation in both the Senate and lower house ensures ease of moving the bill (Kim 2013). The government is keen on manipulating taxation to increase the demand for goods and service to enhance the employment rate.
Tax cuts
The government of the United States enacted on the budget and job act 2017. The primary purpose of the legislation was to ensure economic growth. Furthermore, the country’s rate of unemployment was above the standard rate of three percent. Reduction in the tax enabled the demand for goods and services to increase because of the increase of purchasing power of the consumers (Garacia 2015). Consequently, the fiscal measures created jobs in the nation; the employment rates increased: according to the Dow Jones industrial average, the employment rate has increased with 0.4 percent.
Government spending
The government, under the trump administration, have increased the expenditures on the nation’s projects. Even though some of the projects are controversial, they have increased government spending: the building of the border wall between Mexico and the United States of America to prevent the illegal entrance of the immigrants. The creation of jobs will result due to increased expenditure and demand for goods and services
Monetary Policies
The government of the United States controls the money circulation and the interest rate through the federal bank. The central bank enables the government to control the inflation rate. Furthermore, the power to control inflation is critical to the nation because the prevention of malicious private business to oppress the impoverished people.
Money circulation
The Federal Reserve bank (Fed) during the great recession in the year 2008/2009 employed manipulated the circulation of money in the economy to achieve economic stability(Garacia 2015). Fed sold the treasury bonds to the public; as a result, the money supply in the economy increased significantly: the fed shelled out more than 831 million dollars. Money supply in the economy empowered people to purchase commodities. Consequently, there was an increasing demand for goods and services. The ultimate goal was achieved: to stir economic growth.
Lowering of the borrowing interest rate
Fed lowered the interest rates to enable the banks to lend at a lower interest rate. As a result, the investors were able to borrow more money; invest in business projects( Amsrong 2016). The consumers were empowered to buy; consequently, the aggregate demand for services and commodities rose rapidly. The monetary policy though contraventions revived the industries which had already collapsed. Moreover, the nation achieved the standard unemployment rate of less than three percent.
Housing Bubble
Most of the united states residence considered house ownership as a vital investment. As a result, the housing industry grew steadily from the year 1990 to 2001. The experts in real estates encouraged the residents to own houses; the growth rate of the housing price rate appreciated with an average of more than twelve percent. The growth rate was as a result of the federal reserve bank monetary policy of lowering the interest rate. Consequently, the low-interest rate motivates investors to invest in housing.
The increase rate for the demand for houses led more people to be attracted to invest in housing, and by the year 2004, the prices had sky-rocketed in almost half of the states in the U.S. the higher rates caused the investors to devise ways of obtaining the mortgages to acquire the homes. Conversely, some investors could make a profit before settling in the houses they have bought via reselling them due to high demand.
The lenders of the mortgages formulated ways to issues loan via agencies since most of the borrowers did not have enough securities. Consequently, the borrowers could borrow more money than he or she could repay. The innovation of mortgages to uses agency caused the industry to decline and subsequently to collapse in the year 2007 to 20008 during the great recession. One of the primary reason was that the borrowers could not pay their debt hence increase of the foreclosures.
The increase in the foreclosures caused unfavorable economic conditions in the economy. One of the adverse effects was when the financial institutions that act as agencies began to collapse in the year 20007. The investors panicked and began selling their treasury bills and bonds that they had invested in the housing industry. As a result, the shareholders incurred losses: lost billions of dollars.
The financial institution caused the boom in the housing market by issuing the interest only-loans. Consequently, from the year 2004 to 2007 the country began experiencing inflation rates that were higher than the natural inflation rate. The housing bubbles problem caused 2007/8 crises in the united states. Many investors lost hope in the housing sector, and the financial institution would have sunk if the fed did not intervene.
Government Solution
The government of the united states through the federal reserve bank have initiated policies that have normalized the housing industries. First, the Fed has manipulated the interest rate, reserve rate to control inflation. Furthermore, the federal reserve bank innovated ways to elevated the money market mutual funds and the small business lending business. As a result, the housing price has been stabilizing.
In conclusion, the government, through the Fed, have the power to control the price market, by releasing reports that indicate the economy is growing at the required rate. As a result, the investors continue to invest in housing industry without fear of losing their returns.T he government has also been enacting bills and regulation that enable the housing prices to remain at the standard price. Ultimately, the policies that the senates are formulating regarding increased interest rates will eventually contribute to the growth of the housing sector.
References
Armstrong, S., 2016. Executive stock options, differential risk-taking incentives, and firm value.
Kim, E., 2013. Labour and corporate governance: International evidence from restructuring decisions. Financial growth
Garcia, J., 2015. How does working capital management affect the profitability of Spanish SMEs? Small Bus. Econ.