The Great Recession and the consequently provoked global economic crisis of 2008-2009 had led the USA to the fundamental changes in monetary and fiscal policies. Due to the several unfolding crises – the mortgage lending and credit crisis that developed into a financial crisis – the US government was compelled to adopt new active stabilization policies.
During the recession, monetary authorities faced the unprecedented challenges which could not be treated by the previously developed regulatory methods and did not allow the central bank to maintain the operability of the financial system, solvency of the large financial institutions, and the stability of prices. As a result, the threat of deflation emerged (Rich, 2013). The Congress and the Federal Reserve had to find new effective intervention measures that might improve the situation in the financial market.
The US Federal Reserve took a pioneering position in the introduction of the untraditional monetary instruments. Throughout the recession, it initiated the stimulation of the liquidity of the financial system through the sharp reduction of interest rates and adoption of the new credit lines for a variety of financial institutions, etc., while the fiscal policy was primarily focused on the support of the social infrastructure and the labor market.
Fiscal Policies
After the adoption of the American Recovery and Reinvestment Act of 2009, the federal government immediately commenced the allocation of the assigned funds of $787 billion (2009 American Recovery and Reinvestment Act, 2011). The major initiatives for the support of the economy were aimed at the education and healthcare areas and included the measures for workforce retraining, the creation of jobs, as well as the financial support of the social groups “most impacted by the recession” (ARRA, 2010, par. 1).
The main priorities in the fiscal policy plan were the support of social infrastructure. Throughout 2009-2010, the share of healthcare and education costs ranged from 80 to 90% of the total sum allocated from the federal budget (Orr & Sporn, 2009). Much of the spending on healthcare was allocated for the payment for medical services provided under the Medicaid program focused on the provision of medical services to the poor strata of the US population and tax relief. Spending on education was mainly focused on grants for teachers in primary and secondary schools. In other words, the creation of grants and benefits was an attempt to preserve the employment in educational services when the number of layoffs and downsizing in schools caused by the crisis increased.
Monetary Policies
As soon as the Federal Reserve authorities found the significant losses provoked by the depreciation of the mortgage covered bonds, it shifted the direction of the policy towards interest rate liberalization. The federal funds rate, which at that time was at a high mark of 6.25%, was reduced to 5.75% (Cox, 2015). Consequently, a gradual reduction in interest rates took place and, in November 2008, it was established at the level of 0.25 – 0.0% per annum (Cox, 2015).
The reduction of interest rates served as the mechanism stimulating the economic growth by facilitating cheap loans and pushing entrepreneurs towards seeking higher production income as an alternative to the low profitability of financial assets. At the same time, in the context of the low interest rates, the investments in government bonds became more attractive. Absolute reliability of these bonds made them even more appealing in the unstable market conditions, and the major objective of investors in such situation was the preservation of assets rather than their augmentation.
In this way, the attraction of financial resources to finance the budget deficit became facilitated. With the inflation rate of less than 2% per year, the maintenance of the rate on 10-year Treasuries at nearly 2.5% appeared to be sufficient for the successful placement of the necessary volume of government bonds in the market, as well as for the increase in demand, and stimulation of business activity (Pandl, 2013).
Conclusion
The contribution of the implemented fiscal policy to the improvement of the adverse situation should be primarily defined by its influence on the unemployment rates. Although it was mentioned in the official reports that the temps of the workplace loss decreased by the end of 2009, the slowdown in job losses is not a sufficient indicator of success (Amadeo, 2016). According to the researchers, the multiplier effect was poor because instead of supplying the labor market with new jobs, the increase in governmental spending provoked the replacement of private sector costs, and the central role in this process was taken by the federal legislation on the increase of the wage minimum (Mulligan, 2010).
In 2009, in the context of increasing inflation, a significant increase in the actual minimum wage was observed, so employers started to fire their employees in the large amounts causing the aggravation of the adverse situation.
At the same time, the low level of interest rates followed by inflation reduced motivation for saving and, on the other hand, encouraged consumers to spend money. In the monetary policy, this tactic was regarded as a factor maintaining demand and stimulating economic activity. In an environment of low-interest rates, when real interest rates are negative, the depreciation of cash becomes apparent (Real interest rate, 2016). This fact encourages consumers to spend money. Thus, it is possible to say that the low interest rates supported and even stimulated demand which was correlated with the general direction of the anti-crisis monetary policy.
References
2009 American Recovery and Reinvestment Act. (2011). Web.
Amadeo, K. (2016). What was Obama’s stimulus package? The Balance. Web.
ARRA (American Recovery and Reinvestment Act of 2009). (2010). Web.
Mulligan C. (2010). Simple analytics and empirics of the government spending multiplier and other “Keynesian” paradoxes. Web.
Orr, J., & Sporn, J. (2009). The American Recovery and Reinvestment Act of 2009: A review of stimulus spending in New York and New Jersey. SSRN Electronic Journal SSRN Journal. Web.
Pandl, Z. (2013). The bond risk premium. Web.
Real interest rate. (2016). Web.
Rich, R. (2013). The Great Recession of 2007-09. Federal Reserve History. Web.