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The Great Recession

The beginning of the great recession was marketed by bursting of housing bubble estimated at $8 trillion. Given the subsequent loss of wealth, consumer spending reduced dramatically. Together with financial market chaos, the loss in consumption due to the bursting of the bubble resulted in reduced business investment. As a consequence of the reduced business investment and consumer spending, many people lost their jobs. The United States labor market lost approximately 8.4 million jobs during the period between 2008 and 2009 (Hurd & Rohwedder, 2010). After the great recession, the economic growth has not been robust enough to compensate the lost. The financial crisis has had a wide range of effects, for instance, around 39% of households had been unemployed between November 2008 and April 2010. The unemployment led to the reductions in spending. During the great recession, the US experienced a drastic drop in the real Gross Domestic Product (GDP) because the unemployment caused reduction in spending (Connaughton, 2010).

 

This is evident in the graph below:

Accessed on October 16, 2016 from

https://staticseekingalpha.a.ssl.fastly.net/uploads/2010/11/1/saupload_realgdp3rd20073rd2010.png

The financial crisis resulted in manufacturing crisis; it resulted in the highest declines in industry production in economics that are export based. This is indicated by the graph below. A plunge in the volumes of exchanges is indicated by the second half of 2008.

 

 

 

International trade, 2000-2010. 2000=100.

 

 

The crisis rigorously reduced the normal lending operations of the banks. The consequence was fall in both consumer spending and investment leading to a severe drop in GDP (Hetzel, 2012). The 2008 crisis oil prices peak result in cost-push inflation complicating the situation further. The banks created too much money, too quickly, and this was used in speculating on financial markets and pushing up house prices which created inflation. As a consequence of the cost-push inflation, the Central Bank of the United States became reluctant in reducing the interest rates. After the crisis, Hurd and Rohwedder (2010) assert that the United States experienced an increase in budget deficit levels because of the decrease in government tax revenues. This was due to the banks refusal to lend which caused the economy to shrink further. Such was because the United States (U.S) heavily relied on tax and stamp duty from the financial segment. As a result, Rinne and Zimmermann (2012) argue that the U.S introduced a moderate fiscal stimulus and reductions in interest rates to cut the cost of borrowing thereby encouraging both investment and consumption. Below is a graph showing the effect of the great recession on oil prices.

 

Accessed on October 16, 2016 from https://www.google.com/imgres?imgurl=https%3A%2F%2Fgailtheactuary.files.wordpress.com%2F2011%2F02%2Frecessions-and-oil-spikes.png&imgrefurl=https%3A%2F%2Fourfiniteworld.com%2F2011%2F02%2F25%2Fwsj-financial-times-raise-issue-of-oil-prices-causing-recession%2F&docid=VNRt7Z0eyxxuOM&tbnid=UCnLzMJCWYABJM%3A&vet=1&w=559&h=428&client=firefox-b&bih=631&biw=1366&ved=0ahUKEwih0s6S1a3QAhXIKMAKHZUyBrIQMwgcKAAwAA&iact=mrc&uact=8

 

Given that United States is a developed economy, its tax policy cyclical as opposed to counter- cyclical, pro-cyclical. The export and import sector of the dependent on other economies though on a relatively low margin. In my opinion, the United States can potentially deal with the great economic recession by implementing cuts and layoffs to compensation during bad times (Connaughton, 2010). In addition, the United States can hire in masses and pay bonuses during a right time. In addition, the banking sector should adopt real interest rates as opposed to nominal interest rates. With the actual interest rate, the investors will stand a better chance to increase their purchasing power with both loans and bonds. It suggests to the genuine rate the financial specialist gets after inflation is dealt with off on the grounds that it is a loan cost that outperforms the inflation rate. There is an inverse relationship between inflation rate and unemployment rate. Therefore, when there is a higher inflation rate, the unemployment rate tends to decrease slightly as shown by the Philips curve below. Given that the United States economy is relatively developed, it produces durable goods such as heavy equipment and raw materials thus making it more cyclical (Hurd & Rohwedder, 2010).

The graph below shows the performance of the countries considered. It is evident that only Japan did worse than Germany.

 

The government through the central bank felt obliged to come to the rescue of banks and other financial institutions from going bust. The Central Bank interceded within the banking sector buys bailing out major banks. To prevent the crisis, the Central Bank should be willing and ready to buy securities such bonds to ensure that there are no shortages of liquidity. By so doing, the commercial banks will have credit to lend the public thus increasing the level of consumption and investment (Hurd & Rohwedder, 2010). In addition, the banking sector should adopt real interest rates as opposed to nominal interest rates. With the real interest rate, the investors will stand a better chance to increase their purchasing power with both loans and bonds. It implies to the real rate the investor obtains after inflation is taken care of off because it is an interest rate that surpasses the inflation rate. Given that the United States economy is relatively developed, it produces durable goods such as heavy equipment and raw materials thus making cyclical (Hurd & Rohwedder, 2010).

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