To explicitly analyze the current economic condition, it is vital to consider the financial status of major investment banks and financial institution in the United States of America. In a study by Lahart, (2007) ‘the financial institutions include: sub-prime and prime mortgages industries, Wall Street markets, the Lehman brothers, Citibank group and other major institutions which collapsed following global financial down turn’. The current situation is that banks lack enough funds to lend out following credit default by creditors.
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Increasing national debt is part of the macroeconomic milestone which must be analyzed to determine its effects on the national economy. Declining productivity in both financial and non financial sectors is a clear indication of recession. This has a direct effect on business cycle which was oriented to building investment levels, savings, consumption and ultimately national income.
In a nut shell, recession is evident where national expenditure is at a reduced level. Malfunctioning of subprime lending institution and the credit crunch in the financial sectors are some of the factors contributing to recession. Housing sector is also facing a downward trend where there is a forecast of a 20% fall in the prices of houses which will hinder investment in the sector (Lahart, 2007). Commercial real estates are starting to face a down turn in the residential estates. To add on this, credit cards and automatic loans are on the rise. This is an indication of a collapse in consumer credit. Banks and other financial institutions that financed some projects are facing a risk of default payments. This corporate defaults sums up to bring down productivity of a nation.
The Federal Open Market Committee
This makes up a component of federal system of reserve and is mandated to monitor the operation of open market. The members in the panel are responsible for making a decision on the interest rates of Federal Reserve banks consequently affecting the money supply. Muolo (2008) clarified that if the interest rate is lowered, people would borrow money from banks as a result increasing money supply in the market. This can cause inflation since there is more money chasing the same good. During recession, the panel can make use of this monetary policy to encourage people to borrow and invest in various sectors.
This tool is also available during periods of reduced economic growth and can be achieved when federal bank buys securities from subsidiary banks and the public. In this context, money is exchanged for bonds. Some financial institutions also have more reserves consequently gaining ability to give more loans to investors and the general public. If the reserve ratio is lowered, banks would have more money to give to the public. The net effect of increasing money supply is that interest falls while on the other hand, investment and aggregate demand increases.
Expansionary Fiscal Policy
To stimulate economic growth, president Barrack Obama employed expansionary fiscal policy. The policy simply captures an increased spending on major areas of the economy as compared to the income (Muolo, 2008). Education, employment level, health and social security are to benefit more from budget allocations. Various industries will be streamlined and made to respond fast to unemployment in the nation. A more progressive form of tax aims at bridging the gap between the poor and the rich. The objective of a deficit budget proposal is for socioeconomic equity.
Lahart, J. (2007). Egg Cracks Differ In housing, Finance Shells. Wall Street Journal, 23(4), 1317-1623.
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Muolo, P., & Padilla, M. (2008). Chain of Blame. How Wall Street Caused the Mortgage and Credit Crisis. Hoboken, NJ: John Wiley and Sons.