Macroeconomics

MACROECONOMICS 6

Thegreat recession in the US

Itwas in December 2007 when the US economy was shaken by the mostcommonly known great recession. This marked the longest and greatestrecession since World War II. The duration ended in June 2009. Theimpact of the recession was experienced in various decline in theeconomic activities of a country.

TheUS economy experienced a series of banking failures that led to aprolonged financial crisis. Just a few years before the recession,the country witnessed its housing market collapsing in 2006 and 2007.Since most of the banks had heavily invested in mortgages, they endedup bursting of the housing bubble. However, The US Governmentintervened and tried to prevent the banking system from collapsingbut it did very little in the attempt to restore the economic growth.As a result, the US economy entered into a deep recession in December2007. The National Bureau of Economics (NBER) confirmed the situationas the greatest recession that had a significant impact on the majoreconomic indicators.

Theeconomic situation before and after the great recession

Dueto the great recession, the real gross domestic product (GDP)declined up to 4.3% and the fall was at its peak though the secondquarter of the year 2009. Also, the unemployment rate that was 5%before the crisis rose to 9.5% in June 2009 and eventually hit at 10%in October 2009 (National Bureau of Economic Research, 2013).According to the data published by the Bureau of the economic report,The GDP growth of the two-quarters prior to the recession waspositive. However, just from the definition of the recession as apersisting negative economic growth, the GDP growth was found to benegative after accounting for the inflation. The financial crisisdeepened the initiatives that were intended to recover the economicgrowth were executed on a global basis. The US government just likeany other country applied both fiscal and monetary policies aseconomic growth regaining stimuli.

Thecrisis clearly demonstrated the interconnection among the variouseconomic indicators since a fate in one of them had an impact on theother. The financial crisis spilled the general wealth of theconsumers and hence lowering the real gross domestic product that isthe market value of the output of a country regardless of who isproducing it (Mudida,2010).The banks were heavily impacted and it was not easy for them to lendmoney. The Keynesian economists’ theories suggested that, if notthe government initiatives and policies to control the crisis, thesituation could have been much worse.

Dueto the crisis, the US economy lost about 9million jobs in theduration of 2007 to 2009. This led to high unemployment level. As aconsequence, the US average household lost almost $100,000 on theinvestment. The economic impact was still experienced in the long-runas the unemployment rate remained above 7% as compared to theprevious rate when it was 5% just before the recession period.Unemployed workers will have less income to spend and hence theaggregate demand was expected to lower. According to the classicaltheory, a decrease in aggregate demand leads to a reduction in thereal GDP and vice versa. The families having less or no income willopt to borrow funds from the bank and hence leading to an increasethe demand for money while supply remains constant. Therefore, theexpected results are that the interest rate would increase. Mostemployers also experienced low profits in their business cycles. Inresponding to this, the employers were forced to not only fire someworkers but also reduce the salary expenses by lowering the wagerate.

Thelong-run unemployment that resulted from the great recession exacteda huge economic cost that led to a persistent budget deficits (Alan&amp Zandi, 2013).Young generation were the most victims of the increased unemploymentlevel. The great recession led to excessive money creation in thelong-run and low interest rates which were imposed by the centralbank towards housing. This was complemented by attempts to buildlabour and capital from where it was not profitable to more usefulways. The US government also strived to gain its economic growththrough various strategies.

Howthe negative effect of the great recession was reduced

TheUS government had to respond to the financial crisis with the mostaggressive fiscal policy and monetary policy. Federal reserves andcongress were involved in ensuing the crisis which are stillcontroversial up to date. The debate on these policies is vital sincethe economy is still weak and therefore, more support is still neededfrom the government. The impact on the real GDP, unemployment andinflation were greatly felt in the US economy and the country has notyet recovered fully (Alan&amp Zandi, 2013).The government policies are seen to have done very little in responseto the great recession. The response of the central bank in loweringthe interest rate on mortgages has played a vital role in helping thereal estate and the stock market to partially recover to a greaterextent as compared to the household and job situation recovery.

Thetable below indicates the rate of economic recovery after therecession period as per the National Bureau of Economic Research.

Fully (%)

Partially (%)

Hardly at all (%)

Real estate values

4

59

37

Household incomes (GDP)

2

44

54

Job situation (business cycles)

3

45

52

Stock market

21

59

20

Governmentpolicies have been proven to have done little effort to help poorpeople in boasting the household incomes. Also nothing much have beendone to assist the small businesses in supporting their growthstrategy.

Whatmore needs to be done to minimize the negative impact of the crisis

Thefact that the challenge of the great recession has continuallypersisted up to current with an overall unemployment rate of 9.7%, itis clear that the economic growth has not yet recovered and hencemore needs to be done. The government should therefore first of allstrive to reduce the unemployment rate in their economic growthrecovery. The analysis has shown that, unemployment level is the maintrigger of the economic status of a country. The government shouldalso cut down the tax rates to increase the disposable income of thehouseholds. Raising the government spending would also help to reducethe unemployment level. This will raise the economic growth in thelong run. Immediate fiscal and monetary contraction policies are alsonecessary in helping the private sectors in coming back more stronglyleading to long-term economic health.

References

AlanS., Zandi M. (2013). How the great recession was brought to end?Retrieved October 4, 2015, fromhttps://www.economy.com/mark-zandi/documents/End-of-Great Recession.pdf

MudidaR. (2010).&nbspIntroductionto modern economics, New York:Oxford Press.

NationalBureau of economics. 2013. Retrieved October 4, 2015,from http://www.nber.org/cycles/sept2010.html

RobertR. (2015). The great recession of 2007 – 09 Retrieved October4, 2015,from http://www.federalreservehistory.org/Events/DetailView/58

ZellnerD., Arnold C., (2011),&nbspIntroductionto Bayesian Inference in Econometrics,New York: Wiley.