The year 2008 is a presidential election year. Many people believed there would be a significant shift in government. This belief had a deep-rooted cause in the economy, and it was found that the economy became a fundamental and decisive part of this shift. The importance of the economy to the United States was once again revealed, and it was found that the economy influenced the election by a great margin, and the economic Democrat induced plans of Barack Obama gained more popularity over John McCain’s Republican plan. The people needed an logical financial assurance in regards to the mortgage and financial crisis.
Any large business house, consumer expenditures or governmental schemes may borrow public money in the form of selling shares [1]. A credit crunch occurs when there occurs a lack of obtainable credit in the market and the borrowers cannot find adequate finance. Usually, such a phenomenon happens when the creditors are unwilling to invest more money or hike up their interest rates to such exorbitant levels that it becomes virtually impossible for the lender to borrow [2]. Actually, far from being an isolated fact, it is a part of a complex chain reaction. The lenders reel under deficit money supply when they fail to realize the interest or even the actual capital they had invested in companies or institutions, which accrued a disastrous amount of losses. Even when banks perceive a risky market, interest rates may shoot up to discourage lending to credit crunch [3].
Political issues are largely dependent on the daily needs of the population, and the credit crunch directly affected the wage earners. Rising unemployment has prompted the Federal Reserve to cut down its lending rates. The percent of jobless people in the nation rose from 7.5% in May to 7.8% in June this year. It is also being said that these rate cuts, backed by republican policies, may be too late to help as the time lag before the lowered rates seep into the economy to encourage growth, investment and spending, is about six months. Economists argue that the economy’s recovery has been held back due to the huge debts of the customers and business expenses [4]. It would be relevant to mention that the current account is an extremely important tool that can determine the entire business cycle of a country as the current account can be determined according to trade balance as the difference of import and export of tangible goods and services like consulting and legal. Current account is also instrumental in determining the overseas factor incomes like dividend and income along with the net overseas Unilateral Transfers like gifts, grants, and aids [5].
In the US, five of the leading banks of the world, including the Federal Reserve Bank of USA came together to invest huge amounts of fresh money into the global market to combat the international credit crunch failing economy with about one trillion dollars.[6] Under such circumstances, the most innovative plan to diminish the credit crunch has been to increase lending with the motivation to restore liquidity to troubled markets and look after the demands of the inter-bank loaning facilities [7]. Obama’s plan of financial change related to the current crisis influenced the Federal Bank to decrease the interest rates on lent amounts and lengthen the time limit for the repayment of the loan. “Term Auction Facility” was adapted as a scheme for slow banks through which loans at a cheaper rate could be made available from discounts windows and the deals were guaranteed anonymity [8].
Under such parameters, the fundamental bailout plan, represented by McCain’s republican party, “Hank Paulson’s $700 million no-strings-attached proposal” was disapproved by the US House of Representative [9]. There is, however, Obama’s Democrats instrumented a second bailout plan. It is referred to as Plan B. The Federal Reserve endorses this plan after the failure of the Plan A. It has been reported, “tax credits for the production and use of renewable energy sources, like solar energy and wind power have been. Possible other inclusions originating in the House bill are an extension of the unemployment benefits, protection from foreclosure for individuals, and tax credits for low and medium-income households.”[10] Under such parameters, it can be stated that this plan was initially supposed to be workable, but a Plan C was initiated to be effected as a proper bailout method.
Plan C, as worked out by McCain and the Republican Party, includes an additional input of US$800 billion by the Federal Reserve. The amount of US$800 billion would be instrumental in buying the debts related to mortgage and the credits of the consumers in order to instrument a lending free up. At this point of time, it appears that there are two major problems related to this Plan C. The first one is the fact that there is not enough retail economy spending in relation to consumers. Secondly, there is a lack of consumer credit, and there is no presence of a sound economy to sustain this amount. It is reported that “the Federal Reserve and US Treasury are pumping a jaw-dropping $800 billion directly into the credit markets, buying up $600 billion worth of mortgage debts” [11].
Under such parameters, if the plan B is taken into consideration, it can be stated that this plan appears to be a very slow process. This could be a very logical ploy, and the result could be advantageous for the economy. It should be noted that a very fast and effective measure was needed, and Plan Blacks that speed of operations that is required in this case, but there was too much risk involved. As per implication of Plan B is concerned it can be mentioned, “Pressure is also mounting from constituents for Congress to take action to stop the extreme volatility in the markets as their investments have plummeted. While stiff opposition to a bailout of Wall Street is apparent, direct damage to the net worth of individuals has prompted a call for action”[12].
On the other hand, Plan C has its own faults. Henry Paulson, Treasury secretary, indicates, “This lack of affordable consumer credit undermines consumer spending and as a result weakens our economy“[13]. Thus, it is difficult to implement this plan on a large scale. The market appears frozen, and the credit system is crippled as investors pulled out $240 billion out of the market, particularly from the field of auto loans and credit card market. The Federal Reserve bailout plan of $180 billion could be instrumental in luring investors into the market. In a way, this could prove to be the ideal stage to implement Plan C though there is enough risk involved. Nevertheless, Plan C is quite complicated in nature and the Federal Reserve is reluctant to use it [14]. As a default measure, Plan B, recommended by Obama and his party, became the most logical option and it stimulated the mind of the voters. The result is evident with the win of Obama.
Bibliography
Whybrow, Martin. International Banking Systems Market Report 2007. IBS Publishing Ltd, 2007. p. 64
Lamb, Davis; Cult to Culture: The Development of Civilization on the Strategic Strata. (Wellington: National Book Trust. 2004) pp. 243-245
Dollard, John; Modern Fiscal Policies: A look into Tomorrow. (New Haven and London: Yale University Press. 2006) pp. 89-92
Greenhouse, Steven; Unemployment Up Sharply, Prompting Federal Reserve To Cut Its Key Lending Rate; NYTimes.com; 2008; Web.
GORTON, G. B. PING HE; Bank Credit Cycles; Review of Economic Studies; 75: 4; 1181-1214; The Wharton School University of Pennsylvania and NBER; School of Economics & Management, Tsinghua University; 2008
Grynbaum, Michael M. Persistent Anxiety Over Tight Credit Sends Stocks Plunging. NYTimes.com. 2008. Web.
Cecchetti, Stephen. Federal Reserve Policy Actions in August 2007: Answers to More Questions. Brandeis University; Eurointelligence Advisers Limited. 2007.
King, H; Fiscal Fitness Today (Dunedin: HBT & Brooks Ltd. 2005) p. 126
Rankin, Kyle; Plan B: Go to Congress, Make a Right; Black and White Program; 2008.
3news; US to try bailout ‘plan C’ to solve credit crisis; 3 News / CBS; 2008.
Footnotes
- Whybrow, Martin. International Banking Systems Market Report 2007. IBS Publishing Ltd, 2007. pp 64
- Lamb, Davis; Cult to Culture: The Development of Civilization on the Strategic Strata. (Wellington: National Book Trust. 2004) pp 243-245
- Dollard, John; Modern Fiscal Policies: A look into Tomorrow. (New Haven and London: Yale University Press. 2006) pp. 89-92
- Greenhouse, Steven; Unemployment Up Sharply, Prompting Federal Reserve To Cut Its Key Lending Rate; NYTimes.com; Web.
- GORTON, G. B. PING HE; Bank Credit Cycles; Review of Economic Studies; 75: 4; 1181-1214; The Wharton School University of Pennsylvania and NBER; School of Economics & Management, Tsinghua University; 2008
- Grynbaum, Michael M. Persistent Anxiety Over Tight Credit Sends Stocks Plunging. NYTimes.com. Web.
- Cecchetti, Stephen. Federal Reserve Policy Actions in 2007: Answers to More Questions. Brandeis University; Eurointelligence Advisers Limited. 2007.
- King, H; Fiscal Fitness Today (Dunedin: HBT & Brooks Ltd. 2005) p. 126
- Rankin, Kyle; Plan B: Go to Congress, Make a Right; Black and White Program; 2008.
- Rankin, Kyle; Plan B: Go to Congress, Make a Right; Black and White Program; 2008.
- 3news; US to try bailout ‘plan C’ to solve credit crisis; 3 News / CBS; 2008.
- Rankin, Kyle; Plan B: Go to Congress, Make a Right; Black and White Program; 2008.
- 3news; US to try bailout ‘plan C’ to solve credit crisis; 3 News / CBS; 2008.
- 3news; US to try bailout ‘plan C’ to solve credit crisis; 3 News / CBS; 2008.