Demand-Side Policies and the Great Recession of 2008

Setting off panic and uncertainty , the  end of 2007 was marked by the world’s financial crisis or the Great Recession bursting of the housing bubble in the United States . On declaring Lehman Brothers bank, one of the largest and reliable investment banks in the USA, entered bankruptcy in September 2008, the world’s financial markets were gradually slowing down. There it was the terrifying downturn – recession.

According to the glossary, recession is “the contraction phase of the business cycle. A general period of declining economic activity” (Economic, n.d.). The downturn starts after the economy increases to the top of the business cycle. Recessions have such particular qualities as declining of real gross domestic product by 10 percent, increasing unemployment level, low or non-existing inflation. The duration of recessions is from six to eighteen month

 (Economic, n.d.).

British economist John Maynard Keynes suggested urgent government intervention for boosting the country’s economy in recessions. Manipulating market economy, policy-makers can use two major demands –side policies: fiscal and monetary.

The basic principle of fiscal policy is influencing the rate of aggregate demand in economy to reach price stability, full employment, and economic growth .The two major tools  of fiscal policy are government revenue collection and expenditure , the actions  are undertaken by government (e.g. U.S. Congress, Treasury Secretary). For instance, policy-makers can increase government spending to boost demand or they can decrease taxes to rise disposable income for individuals and enterprises. The fiscal policy has three key stances – neutral, expansionary and contractionary. Expansionary policy is usually undertaken by the government during recessions. 

Monetary policy can be defined as “economic strategy chosen by a government in deciding expansion or contraction in the country’s money – supply” (Business, n. d.). The main idea of monetary policy is influencing the supply of money for affecting outcomes as economic growth, inflation, exchange rates and unemployment. Major instruments are interest rates and reserve requirements. For instance, to reduce money supply, interest rates can be increased (Fiscal, n. d.).

Economists have contradictory opinions about the bodies having the right to influence the economy and major tools of manipulating the open market. Some prefer fiscal policy that includes taxes and government spending, the other insists on undertaking monetary policy (interest rates and reserve requirements).

During the Great Recession the above-mentioned demand - side policies have passed a severe test as for corresponding today’s economic reality. Undertaking fiscal policy, Congress took fiscal measure to boost the ailing economy. The fiscal policy consisted of two key measures: the automatic stabilization system and the emergent boosting measures. Being undertaken by all government programs, automatic stabilization stimulated spending and cut the taxes on households and businesses. At the beginning of 2009 American Recovery and Reinvestment Act was passed, having original amount of US$ 825 billion dollars and subsequently reduced to US$ 787 billion. 53 per cent of this sum could be for tax cuts , 23 per cent of the account could be attributed for government purchases. On the one hand, fiscal deficits and debts could make a severe negative impact on economic growth and social services. In fact, there were no special actions resulted in significant changes directed on social protection. Only several temporary programs were represented. For example, authorizing generous subsidies by Congress resulted in temporary guaranteed health insurance received by dismissed workers. Though, on the other hand, the extraordinary actions prevent the economic collapse.

Undertaking urgent monetary policy, the Federal Reserve Board began to cut short- term interest rates at the end of 2007. To save the country from economic collapse and rising unemployment, the Federal Reserve Bank made extraordinary and risky decision to cut interest rates to virtual zero and buy longer-term Treasuries and agency mortgage debt. At the end of 2008, rates were lowered to the current target range between 0% and 0, 25 %. Being worried by signs of instability in the financial markets, the FRB lowered the federal funds level and granted the loans in exchange for collaterals. The Fed was trying to decrease mortgage rates by such aggressive steps. On the one hand, such a risky decision could lead to unpredictable inflationary consequences. Though, on the other hand, without these urgent actions, many enterprises would have been declared bankruptcy and financial market would have been inflicted much more damage (Tchervneva, 2011).

To summarize, the Great Recession has appeared  to be the deepest recession the world faced for over previous six decades . Emerging at the end of 2007 from the housing bubble, it was a severe test for corresponding existing economic theories and practice today’s reality. Profound world’s economists considered the best, often risky and contradictory, ways to reveal the economy. The expansionary demand-side policies have been effective in healing the country’s economy. Nevertheless, though the recovery phase has started, a number of burning problems are to be solved for stabilization world’s, and the U.S. particularly, economies. The top risks to the revealing economy are connected with “the premature withdrawal of the stimulus packages, the continuing and emerging imbalances… and the challenge of setting an appropriate level of regulation for the financial sector…” (Veric & Islam, 2010). These factors should be taken into account not to make gross mistakes leading to the Great Recession of 2008.            

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