Economic Recession in the US
Introduction
Microeconomics deals with minor issues in the economy in an attempt to understand the decision-making approaches by households and firms. Macroeconomics, on the other hand, deals with the aggregate picture of the economy and how it affects the whole society. Macroeconomics handles matters related to inflation, recession, unemployment and economic growth. An economic recession is a period when the economy stops growing and begins to shrink. It occurs when the value of goods and services produced in a country or rather when the gross domestic product falls for two consecutive quarters.
In the US, according to the National Bureau of Economic Research, a recess is a significant decline in the economic activities in the country that occurs and lasts for a long period characterized by a decrease in employment, industrial production, reduction in income, shrinking Gross Domestic Product and decreased retail sales. Economic recess in the US comes in different shapes, size, and lengths. They have varying implications and aftermaths to the US economy. Some have long-lasting effects on the economy while others are easily forgotten. Some type of recess will affect all the parts of the economy while others will target some specific segments of the population. Some slight recession shifts may not be notable because there is no change in the labour markets, but some group of individuals may get devastated. At the moment the United States economy is in the turmoil of its worst financial crisis second to the Great Depression.
Causes of the recession
The economic recession in the US is attributed to various macroeconomic approached and practices by the local market and policies by the federal government.
Home mortgage market
The crisis has its roots in the home mortgage market where most of the working class citizens are dreaming and working hard to own a home in their lifetime. The subprime mortgage is the greatest contributors to this financial crisis. The debts have grown into prime mortgages, corporate junk bonds, commercial real estate which harms the US economic well-being. It is estimated that the total losses made by the U.S. banks could escalate to the levels reach as high as one-third of the total bank capital. The economic crisis has caused a sharp reduction in bank lending rate a problem that is reflected by a severe recession in the U.S. economy.
Factors deepening the recession
The recess was further facilitated by the decline of the rate of profit. The period after World War II which is between 1950 and mid1970s, the rate of profit in the U.S. economy declined from around 22% to around 12 % which amounts to 50% decrease. The huge decline in the rate of profit was part of a general worldwide trend during this period which was affecting most of the capitalist nations that had participated in the war. The decrease in profits for the American economy led to the twin evils characterized by high inflation rates and high levels of unemployment. The nation experienced decreased business investment due to lack of profit by the investors causing further strain in the employment sector and much slower growth.
Governments’ response to the crisis
Like many other governments affected by the recess due to the aftermath of the second world war, the American government responded by attempting to reduce unemployment by adopting expansionary fiscal and monetary policies. There was more government spending, lower taxes, and lower interest rates. These monetary policies generally caused more problems evidenced by increased rates of inflation, as capitalist firms responded to the government stimulation of demand by rapidly raising prices in order to restore the rate of profit, rather than by increasing output and employment.
The intervention failed to work and in the 1980s and the financial capitalists lamented over the rise in the rate of inflation. They forced the government to adopt more realistic macroeconomic approaches such as tight monetary policy higher interest rates. It resulted in less inflation and a return to higher unemployment. These government policies affected the particular combination of unemployment and inflation at particular times, but the whole issue was on the decreased profit margins in the economy.
Strategies to restore the rate of profit
Increasing the prices of commodities at a faster rate
Capitalists in the US economy are working hard to bring the rate of profit back up to its earlier state of higher levels. They are increasing the prices of commodities at a faster rate, which reduced real wages or at least eliminates the increases in real wages. Increased profits have achieved the relevance of increasing productivity in the recent past in the US economy. Most companies in the U.S economic market are working to reduce money wages for the first after the Great Recession. Workers in the US are faced with the problem of either accepting lower wages or to quit their jobs.
Cut back on health insurance and retirement pension benefits
The government has embarked on a strategy to cut back on healthcare insurance and retirement pension benefits. The employees are required to pay a higher insurance premium for their medical covers. Employees have been treated to compromising retirement plans and being forced to work for longer years than they anticipated. This has rendered the young generation jobless.
Making workers work harder and faster on the job
Enforcing a speed up strategy at the workplace has created a labour intensive market which increases the value produced by workers and therefore increases profit and the rate of profit. There is the availability of worker willing to engage in this profit enhancement strategy due to plenty of works as a result of the high unemployment rate in the country. It causes competition for the limited job slots available in the market therefore hard work is inevitable. It is achieved by downsizing the workforce, and the remaining lot has to work harder to compensate for the laid down employees. The strategy encourages hard work to avoid being laid down.
Companies using bankruptcy
A recent strategy by the American firms is to declare themselves bankrupt. This allows them to continue working while giving them time to negotiate their debts. The companies declare their union’s contracts null and void. Declaring Chapter 11 bankruptcies has helped companies make steep cuts in wages and hence returns.
Relocation to areas with low production operations
Capitalists in the US are relocating their firm to regions where production cost is low in an effort to cut on wages and increase profits. It is the new driving force behind globalisation. All these strategies to reduce the wages and increase profit have had adverse effects and frustrations to the American workers. It has led to high unemployment rates, increased inflation rates, much distress and exhaustion in the workplace, increased crime rate as well as lowers standards of living. The reduction in the cost of production by the US companies and the recovery of the rates of profit has been a success at the expense of the US workers.
The new structure of the home mortgage market
The home mortgage market structure in the U.S in the recent past has contributed to the expansion of mortgages to low-income workers. In the old days, commercial banks in the US used to have mortgages plans and own them for their entire thirty-year term. This created a strong financial incentive to ensure that the borrowers were credit-worthy and likely to be able to keep up with their mortgage payments. Recently commercial banks no longer hold these mortgages, but instead, they sell the mortgages to investment banks that consolidate them into mortgage based-based securities.
The investment banks usually sell these mortgage-based securities to pension funds, foreign investors to make profits. The commercial banks and the mortgage companies who are the originators of these security mortgages will not be required to finance the incentive of accessing the creditworthiness of the home buyers.
The current crisis
The decrease in mortgage prices in the US is an indication that homeowners will no longer refinance when their mortgage rates are reset. It is caused by delinquencies and defaults of mortgages to increase sharply among subprime borrowers in the mortgage industry. The American dream of owning your own home is turning into an American nightmare for millions of families therefore, these mortgages may fail to work in the long run. The economic forecast suggests that the number of foreclosures resulting from this crisis may arise from three million to eight million in the next few years. Defaults and foreclosures on mortgages investments mean losses for lenders.
On top of the loses made on mortgages there is a likelihood there will be losses on other types of loans as a result of the weakening economy in months to come such as consumer loans, corporate junk bonds, and commercial real estates. It is estimated that the financial institutions in the US economy will suffer close to half of the total losses of the financial sector. The rest of the losses will be spread to other non-banking institutions such as pension funds. It will result in a severe blow to the bank and the entire US economy since it is dependent on the banks for loans. On top of the credit crunch in the US, consumer spending will be further depressed in the months to come. This is as a result of the end of mortgage equity withdrawals, decreasing household wealth; the end of mortgage equity withdrawals, and declining jobs and incomes.
Government policies to solve the recess crisis in the US
The United States is acting steadily to avert further implications of the financial recession in the country which has positive outcomes in the short term basis. Capitalists are on the watch to see successful it will be in the long run.
Federal Reserve
The Federal Reserve has adopted expansionary policies to lower the short-term interest rates and then increase loans to commercial banks in the thought that banks will multiply their lending to businesses and households. This is a traditional policy that has not been effective over time since the banks have been unwilling to increase their lending. This is due to the lack of trust on the creditworthiness of the borrowers. The loss of capital they are suffering from and are likely to suffer in future impairs the banks from executing this strategy to maintain an acceptable loan to capital ratios.
This traditional policy failure has prompted FED to improvise new, unprecedented policies. It has broadened the eligible collateral for its loans to the local and international banks operating in the US economy. Initially, on the treasury bonds were allowed to borrow but currently, all sorts of more risky securities are eligible, including mortgage-based securities. Fed has extended loans to investment banks for the first time in its history. Investment banks in the US are not regulated by the Federal Reserve, and therefore it was not considered to act as a lender of last resort to investment banks faced by a financial crisis. Fed has intervened severally to save investment banks in the verge of bankruptcy to avert serious financial constraints to the economy especially when the bank has debts to many lenders. The US financial system is very unstable, and therefore the Federal Reserve has to intervene in some situation to avoid financial risks to the economy.
Fed’s strategy of unprecedented policies has been relatively successful but not to a complete success. The approach has achieved a solution to an all-out financial collapse in the US financial markets. The strategy is restoring investor confidence in the financial markets as a result of the commitments Fed to take necessary measures to avoid financial turmoil. This effort has not yet been adopted by the commercial banks and investment banks who have not increased their lending. Fed’s policies may not solve too much household debts, rising foreclosure rates, and declining housing prices because it does not regulate the investment banks in the country.
Congress
This is the legislative house in the US government. The house oversees the governments budgeting and spending processes. They pass and amend financial policies where necessary to avoid plunging the country into crisis when foresighted. The house members’ debate about all important government plans to use the federal reserves and make appropriate decisions regarding the government’s intentions to spend. The house acts as a watchdog for the government’s spending on the various departments. They trail and hold the responsible regime into the accountability of the taxpayer’s resources.
Congress quickly passed the economic stimulus bill of $168 billion in February 2008 that was comprised of the tax rebates for households and tax cuts for businesses. The tax cuts brought some positive implications on the economy during the summer of the same year but it temporal and small. The tax rebates provide a one-time boost to consumer spending as they are only spent only once.
In 2008 Obama and Congress introduced a second stimulus of 850 billion dollars for spending in health care, state education, and infrastructure. The second stimulus had positive effects in that it was short-lived. This approach has negative effects on the economy in the long run because when recovery finally comes, it will be slower than usual since the interest rates will have hiked and taxes will have to be higher to be able to fix the pay for today’s stimulus spending and the tax cuts. Expansionary fiscal policy does not provide solutions to the fundamental problem in the economy. The economic problems include heavy debt burdens of households and businesses that suggest an emergence of bankruptcies and restrain spending.
The refinancing of existing mortgages which were in default with new mortgages with an approximate value of 85%of the current market value of housing was passed by Congress in July 2008. The mortgage would otherwise be guaranteed by the Federal Housing Administration. If capitalist financial systems are left on their own, they would be very unstable and could only evade crises by being bailed out by the government which is costly to the taxpayers. This suggests that the capitalist financial system is potentially volatile and the necessary bailouts are economically unjust to the citizens of the country who pay taxes to the government.
Fed should nationalise finance
There is a contracting effect between capitalist economies for governments and the public and also for the left. In case of a financial crisis threat in a capitalist society then there exist two options of averting the crisis which includes bailing out the financial capitalists in some way or suffer a more severe financial crisis. This approach will definitely trigger severe crisis in the entire economy leading to widespread misery and hardships for the government and its citizens.
If I was running Fed, I would avoid this misery by making the economy less dependent on financial capitalists. I would achieve this independence from financial capitalists by making the government become the main provider of credit in the financial market mostly in the home mortgages sector, consumer loans, and for the business loans. Fed ought to be nationalized and operated by the government in the interest of public policy objectives. In the United State, the quasi-nationalization of Fannie Mae and Freddie Mac that is already in existence should be made permanent. The government mortgage agencies operating in the country should work to attain a public policy strategy of affordable but decent houses for all the citizens instead of capitalizing on profit maximization.
The next thing would be to nationalize and operate the major banks that are at the risk of bankruptcy in order to achieve similar public policy objectives. A write-down of the existing debt for the nationalized banks needs to be done in order to make them solvent without costing the taxpayers in the country. This is prudent to stay away from the dilemma of bailing out capitalists or keep suffering worse economic issues. The institutional framework of the financial framework in the country needs an amendment so as to stay away from these capitalism financial crises for the sake of future generations. Conversation from financial capitalism to nationalised government finance is the only viable option to avert recess and issues related to financial meltdowns like inflation and unemployment.
The nationalization of banks may not necessarily solve the current economic issues in the US, but it acts as a stabilizer to the banking system in the country. It will further increase the lending capacity of the banks to creditworthy firms and clients. A significant write-down of the huge debts created by mortgages, consumer debts, bank debts, and business will help to solve the current financial crisis in the US economy.
Conclusion
The nationalisation of commercial and investment banks is an important approach to solving the problem of capitalism financial crisis and a step to socialism. Using government financial institutions to pursue important public policy demands rather than focusing on the profitability of the firms is the best model for a crisis-free economy. Recess causes misery and suffering to the citizens of the affected country. Appropriate macroeconomic practices should be employed to avoid an economic crisis in a country. Unemployment in a country causes misery to the citizen and a subsequent increase in crime rates. An economy that is on some democratically decided policy and objectives would offer more satisfactory service to the citizens than the current capitalist system that is aimed at profit maximization.