MONETARY POLICIES
The USA experienced a tremendous financial crisis in 2008 that in words of Ben Bernanke, ‘It was the worst in world history exceeding the Great Depression. The crisis resulted in brutal effects on the US population, rendering them unemployed and an overall negative economic growth. The ‘great recession’ though an avoidable crisis, was triggered by extensive failures in financial regulation and the dramatic collapse in corporate governance. The consistent system failures disordered the movement of credit to corporations and consumers. The housing bubble drove the US economy that when it busted, private residential investment dropped by above four per cent of the GDP. Consumption aided by bubble-generated housing riches slowed down. The combination of banks incapable of giving funds to homeowners and businesses, paying down liability relatively than borrowing and spending, caused the 2008 great recession. The European and American economists, the primary culprit of the calamity, was financial supervision and regulation. As the recession and financial crisis deepened, the government had to have an immediate response through measurements purposed to revive economic growth where they implemented fiscal stimulus programs using varied combinations of government tax cuts and spending. To quench the official public view, the Federal government used $787 billion in arrears spending in the struggle to enable the economy.
Monetary policies are policies by the authorities to control interest rates on money supply or short term borrowing; hence this was a vital tool in the USA regression crisis. The Federal Reserve responded to the regression by raising the federal funds rate that led to developed interest rates and spending less throughout the economy. In 2007 September, the FED started to reduce the interest rates to 2008 June systematically. The Fed took to purchase substantial scale assets meant as quantitive easing and forwarding guidance on the interest rates. Baxter deduces that ‘Permanent changes in government purchases induce larger effects than temporary changes’. The Federal Reserve enabled to support and liquidity by various programs inspired by the desire to progress the performance of financial markets and institutions hence limiting the harm to the US economy. Open market operations purposed to change the supply and interests. Milton Friedman states, ‘those who hold money do not suffer any loss in the value of money due to inflation’. The money supply is the root of economy, and Federal Reserve conducts open market operations that happen at the financial system’s heart. An example is when the Fed purchases government securities; their payment is with new money that’s added to the banking system reserves.
The congress had a mandate to respond to the calamities unfolding in the heart of America to give hope and save the sinking country’s economy. The congress felt partially protected by the financial innovations as the as mortgage-backed securities and collateralized default swaps, and the banks expanded their lending to dangerously high levels on home mortgages. Then-President George Bush signed the passed bill by USA Congress, Economic Stimulus Act, a $152 billion stimulus meant to help stave the recession off. The American Recovery and Reinvestment Act of 2009, was an incentive package ratified by the 111th US Congress and made a law by President Barrack. The Act was an extraordinary response. It was aimed to promote economic growth and recovery and involves measures to enhance energy independence, modernize our nation’s infrastructure, preserve and develop affordable health care, expand educational opportunities, protect those in great need and provide tax relief. The Act was a crucial round of federal expenditure aimed at recovering and creating new jobs lost in the 2008 great recession.
Fiscal policy tool was effectively used to ease the ranging pressure during the recession. Fiscal policy either through variance in taxes or spending, it alters the aggregate demand. The demand is affected outwardly in terms of expansionary fiscal policy and inwardly on the contractionary budgetary policy case. Over time, the quality and quantity of resources rise as the population; thus, labour force enlarges as business finance in new capital, with an improvement in technology. The outcome of these steady shifts to the right of the aggregate supply curves. Fiscal policy can help restore a county’s economy to potential GDP. The primary goal of fiscal policy is to slow down the economy to control inflation, that is reduced budgetary policy and to accelerate the growth of a weak economy that is expansionary policy.
On the other hand, monetary policy has three objectives which are; managing employment levels, controlling inflation and maintains long term rates of interest. The Fed facilitated monetary policy by the use of reserve requirements, discount rates, open market operations, inflation targeting and the federal funds rate. The tools are effectively used to increase the money supply in the economy that, in return, stabilizes the economy.
It is unfair to claim that the policies have failed in their operation as they pressed hard to control the sinking USA economy through strict implementations. Through monetary tools, the US government was able to stabilize the sum of funds in the banking system. The level of employment was significantly promoted in the recession period. The job was to the maximum for the good of the people. With the bad state of the economy in the USA in the recession time, fiscal policy acted very effectively with monetary policy unable to boost the demand. The government made various amendments that were targeted to solve the crisis of the time so, as to stimulate economic growth, they increased spending for goods and services that in return, increased the demand.