As President George W. Bush’s term moved closer to the end, a major financial crisis rocked the world. Prior to the onset of this major downward trend, the United States economy seemed to be thriving as financial institutions had generous consumer lending practices, and there was a lot of new money in the economy. Also, during this time, people were obtaining mortgage loans at record rates. Over time as the liquidity in the market continued to increase, so did the volumes of defaulted loans, which created major concerns by investors.
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By December 2007, financial institutions started to constrict lending practices, and the economy declined rapidly. Without success, President Bush was trying to put programs in place in 2008 to help offset the downward spiral. Companies laid-off workers to reduce cost, others went bankrupt, financial institutions became risk-averse, interest rates rose, cost of living escalated, and the United States economy spiraled toward an irreversible recession.1 During the presidential campaign in 2008, Barack Obama focused on the recession recovery as a priority for America.
After being elected in November, President Barack Obama began his term in January 2009 and was the leader of a country faced with very high unemployment rates, increased cost of living, tax burdens, and the highest inflation rates seen by Americans in many years. He immediately developed a committee to develop a strategy for economic recovery and restoration. In February 2009, Congress and President Obama signed into law the American Recovery and Reinvestment Act (the Stimulus). The Stimulus, opposed by many Republicans and a few Democrats, included numerous recovery programs, was specifically designed to counteract the financial crisis, improve the economy and address the core financial system regulatory issues that contributed to the economic crisis.
The American financial sector is the backbone of the country’s economic growth. Adequate regulation and oversight are important in preventing economic crises. Regulatory institutions develop policies that monitor for threats and discourage financial institutions from taking excessive risks. Between 1987 and 2006, Alan Greenspan served as the Chair of the United States Federal Reserve. Under Greenspan, the American financial sector loosened financial regulations and implemented changes that would, in time, contribute to a recession that the country is still recovering from in 2014.
Following the Stock Market Crash in the early 2000s, the Federal Reserve relaxed interest rates on loans to increase credit accessibility to consumers from nearly all economic status levels as well as investors. Liberal changes to laws, such as the Depository Institutions Deregulation and Monetary Control Act, 1980; Depository Institutions Act, 1982; and the Gramm-Leach-Bliley Act, 1999 were being modified which greatly relaxed banks and financial institutions lending practices. Deregulation significantly increased the number of unsecured and unmonitored loans in the market. Lending was abundant, and mortgages were booming across the country.
High-profit loan practices and Black box financial models were becoming norms in investment communities and financial institutions. There was intense competition in the financial market due to low-interest rates, and most banks altered their risk profiles to meet the needs of the growing market. Such a situation explains the increased supply of and demand for credit mortgages and eventual rise in house prices during the financial crisis. 2The Stimulus implemented tighter controls to these imbalances with clear separation of commercial and investment activities. For example, the Stimulus gives the Federal Reserve the power to regulate interests paid on deposits, which in return, dictates what banks can earn from commercial loans.
Governmental monetary policies in the financial industry are important because they set investment boundaries that ultimately define consumer lending behaviors. These policies were very relaxed and lacked oversight prior to the crisis as banks developed a very large financial build-up that they became forced to engage in increased liquidity and take greater credit risks to further increase their cash flows. More secure investments, such as home mortgages, became easy targets for profit-oriented investors.3
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Housing prices increased as consumer demands increased. Once mortgage prices went up, interest on mortgage financing increased, which compounded the strain on the debtors that were financing the loans. As the number of defaulted loans increased, banks were forced to seek more funds from creditors. These banks then sought loans from bigger banks to maintain their businesses. Once this defaulting cycle starts, it is very difficult to stop because it creates a domino effect throughout the entire loan repayment pyramid.
Many financial institutions tried to overcome the poor balance sheets by increasing unsecured loans As many Americans were securing loans to keep up with market liquidity, needs for other additional funds occurred as inflation rates went up. In order to control the rate of liquidity and reduces risks of loan defaulters, banks continued to raise interest rates on loans which further increased the cost of living. Increased borrowing led to increased amounts of loans repayment failures which played into the domino effect.
The Stimulus set out measures to cut down the excess taxes on the working population to reduce the levels of defaulted loans.4 In order to restore sanity in cash flows and regulate mortgage prices, the United States needed financial system structural changes and stricter regulatory standards… Such a situation explains the increased supply of and demand for credit mortgages and eventual rise in house prices in the United States during the financial crisis.5 The Stimulus would address the tightening of regulatory controls.
The Bush administration was implementing reactive solutions that did not make much of a positive impact on the economy’s recovery. By January 2009, the American economy had lost over five million jobs. Consistent with most political campaigns, people and policy changes occur as the new elected official drives the agenda set forth in their campaign. The election of President Obama and increase in the number of Democrats in the Congress represented a paradigm shift towards welfare programs.6 Election of a Democrat into presidency, Senate majorities, and House majorities supported change. As John Kingdon Policy Stream model explains, in a case where a Democrat wins the presidency, the national mood swung towards liberal and relaxed policies with emphasis on the less fortunate members of the community.7
It is this swing in national mood that further supported President Obama and the Congressional Democrats passing of the Stimulus. The increased number of Democrats in the Congress meant that policymakers could bargain for the passage of new laws. Lobbyist from organizations like Sierra Club, Environment America, Leadership Conference on Civil Rights, National Association of State Universities and Land-Grant Colleges as well as the Democratic majority we in favor of the President injecting an $831 billion stimulus package into the economy. In February 2009, The American Recovery and Reinvestment Act stimulus signed and provided $831 billion strategic road map to reverse the economic crisis.
The Stimulus focused on increasing funds to states and regional governments. The Act included federal Medicaid matching rates, increasing aid funds for education programs, and providing significant funding for transportation, construction, energy, environmental and other long-term infrastructural projects intended to add jobs into the economy. The Stimulus provided funds for tax cuts and increased benefits to the working families and businesses. It also addressed the high unemployment troubles across the country and included increased funding for unemployment benefits.8
In addition, the Stimulus raised exemption amounts for individuals and businesses to give tax reliefs for the already overburdened taxpayers. Introduction of Making Work Pay Tax Credit represented an alternative minimum tax payment mechanism that took into account deductions based on depreciation of business equipment and work value.9 Provisions were included to reduce excess spending by the federal agencies and ensure accountability in management of these new public dollars and resources. The Stimulus required stricter accounting requirements mandating that beneficiaries of the cash detailed quarterly reports on progress and spend.10
Another example of major outspoken supporter of the Stimulus included American Council of Engineering Companies (ACEC). ACEC strongly believed that the Stimulus provided critical investments in America’s transportation, environmental, and energy infrastructures. ACEC believed the bill would provide for a rapid economic growth and project development needed for job creations.11 David Raymond, the Chief Executive Officer of ACEC and his team argued in support of the Stimulus as a great recipe for economic recovery and reinvestment to regain America’s lost economic glory after the financial turmoil.
Even though the American Recovery and Reinvestment Act stimulus passed most of the Republican representatives in the House voted against the bill. In fact, 177 Republican Senators did not support the bill. Many Republican supporters and party loyalists regarded the bill as bad policy that would merely extended the countries financial crisis. Even a few Democrats did not go with the majority and did not support the bill. House minority leader John Boehner led the debate against the bill suggesting that the Stimulus presented a black box method of expanding the social contracts. Ken Calvert, the Republican House Representative for California was vocal against the bill because he believed it lacked appropriate control measures for monitoring the designated programs receiving the money.
Other Republicans, such as Senate Minority Leader Mitch McConnell and Indiana’s Representative in the Congress Mike Pence did not support the bills design and spending allocations and believed it was not the long term solution to economic recovery. Others such as, Senators Arlen Specter, Susan Collins, and Snowe Olympia abandoned from Republican Party after voting in favor of the Bill. The current House Speaker, John Boehner, continues to criticize the Act claiming that it worsened the American financial problems. He contends that the passage of the Stimulus left thousands of Americans from securing employment, making the probability of future debt even higher.
With America facing a major economic crisis in 2008, newly elected President Obama implemented the, The American Recovery and Reinvestment Act stimulus in February 2009. Kenneth Rogoff, an economics professor at Harvard School of Business, believes that passing of the Stimulus provided the best economic rescue strategy. In his writing on the aftermaths of the economic crisis, the professor argues that despite the few flaws existing in the law, it provided the best starting ground for economic recovery and reinvestment, as it touched all sectors of the American economy.12
Even skeptics like investor Jeff Carter believes the Act cut down on government spending which is integral to economic growth and reducing taxes. The Stimulus provided major funds for projects related to infrastructure development and energy. It supported the private sectors ability to generate jobs and increased money in the market. The Act provided necessary social and political structures to support struggling Americans as well as tightened up the loose financial regulatory policies that created the crisis. The American Recovery and Reinvestment Act Stimulus provided a strong starting point for the Obama administration.
“An Act.” U.S Government Printing Office. Web.
Adrian, Tobias and Hyun Song Shin. Liquidity and Financial Cycles. Basel, Switzerland: Bank for International Settlements, Monetary and Economic Dept., 2008: 14-24.
Conley, Richard. “Politics, Promises, and Partisanship? An Analysis of President Obama’s Economic Stimulus Plan at the Congressional District Level.” Journal of Political Sciences & Public Affairs 1, no. 3 (2013).
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Copeland, Claudia and Nicole Carter. Water Infrastructure Funding in the American Recovery and Reinvestment Act of 2009. Washington, D.C.: Congressional Research Service, 2009.
Crocket, Alan. “ACEC urges House passage of American Recovery and Reinvestment Act of 2009; Repeal of 3% Withholding Mandate.” Business Wire. Web.
“Estimated Impacts of the American Recovery and Reinvestment Act on Employment and Economic Output in 2013.” Congressional Budget Office, 2014. Web.
Estimates of Job Creation from the American Recovery and Reinvestment Act of 2009. Washington, D.C.: Executive Office of the President, Council of Economic Advisers, 2009.
Feldman, Jean. “NSF Regional Grants Conference: America Competes Act Implementation.” National Optical Astronomy Observatory. Web.
Kingdon, John. Agendas, Alternatives, and Public Policies. New York: Longman, 2011.
“The American Recovery and Reinvestment Act.” Congresswoman Yvette Clarke. Web.
“The Recovery Act.” Recovery. Web.
- Tobias Adrian and Hyun Song Shin, Liquidity, and Financial Cycles (Basel, Switzerland: Bank for International Settlements, Monetary and Economic Dept., 2008), 14.
- Jean Feldman, “NSF Regional Grants Conference: America Competes Act Implementation,” National Optical Astronomy Observatory, Web.
- Richard Conley, “Politics, Promises, and Partisanship? An Analysis of President Obama’s Economic Stimulus Plan at the Congressional District Level,” Journal of Political Sciences & Public Affairs 1, no. 3 (2013), 186.
- Adrian and Shin, Liquidity and Financial Cycles, 20.
- “The American Recovery and Reinvestment Act,” Congresswoman Yvette Clarke, Web.
- John Kingdon, Agendas, alternatives, and public policies (New York: Longman, 2011), 64.
- “The Recovery Act,” Recovery, Web.
- Estimates of Job Creation from the American Recovery and Reinvestment Act of 2009 (Washington, D.C.: Executive Office of the President, Council of Economic Advisers, 2009), 25.
- “Estimated Impacts of the American Recovery and Reinvestment Act on Employment and Economic Output in 2013,” Congressional Budget Office, 2014, Web.
- “An Act,” U.S Government Printing Office, Web.
- Alan Crocket, “ACEC urges House passage of American Recovery and Reinvestment Act of 2009; Repeal of 3% Withholding Mandate,” Business Wire, Web.
- Claudia Copeland and Nicole Carter, Water Infrastructure Funding in the American Recovery and Reinvestment Act of 2009 (Washington, D.C.: Congressional Research Service, 2009), 28.