Course and course code:Economics for business ECO 4300 Essay

(a) How successful has the government and the Federal Reserve been in running the American economy over the last three years?

            The United States of America economy is considered to be the largest national economy on the globe, given that its Gross Domestic Product is over 14 trillion USA dollars in the latest world economic records of 2008. This shows that the major policies that are undertaken in the United States have an influence on the other economies around the world, either to the developing or the developed economies. In the recent past, the united states of America in conjunction with the Federal Reserve have managed to undertake a number of  macroeconomic policies, that the economists and other financial analysts could deem as to have resulted to both negative and positive effects in the United States of America and other nations in the world. Some of these successes are analysed in this question in relation to the different policies, which were undertaken in the past three years prior to the current economic crisis[1].

            On the positive side, some of the macroeconomic policies which were implemented by the Federal government as well as the Federal Reserve lead to the boom in the housing sector. The policy that was implemented with an intention to reduce the level of interest rate, as well as the loosening the lending requirements in the mortgage sector of the economy, that lead to the reduced cost of borrowing. This is evidence whereby the prices of the houses recorded affordable rates as well as the construction sector, proving to be profitable. This was the case as most of the investors were able to afford financing for their investments in the financing sector. The reduction in the level of interest rates lowered the cost of living for most of the residents of the United States of America[2].

            In the implementation of the macroeconomic policies, the government and the federal government has ensured that economic freedom is allowed to both private and public sector. This is the case whereby the two sectors are able to make a number of economic decisions, which seek to determine their direction as well as the scale of their operations. In doing so, the government and the Federal Reserve have managed to attain minimal levels of intervention by the government in the operations in the global economy[3]. In addition to the achievements that the federal government has managed to achieve in its operations, it is said that it has managed to show concern to its tax payers. This is when the level of taxes were reduced so as to take care of the effects that had resulted from the terrorist attacks as well as other detrimental effects, that the economy of the united states of America was experiencing at that time and in the previous period[4].

            In relation to the various macroeconomic policies that the Federal Reserve as well as the government of the United States of America had made for the past three years, a number of negative effects have arisen in the global economy including the economy of USA. Through which an analysis can be made on the extent to which such the actions of the government and those of the Federal Reserve have managed to achieve success in the United States of America economy. Following the implementation of the various macroeconomic policies in the present time, there have arisen a number of concerns, whereby there was recorded the emergency of the instability in the financial markets all around the world, and the united states economy in major part controlling the world’s economy caused alarm to most of the financial experts[5].

            One such negative effect is the economic instability which has registered a high number of collapse cases of the financial institutions. Considering that the government as well as the Federal Reserve consider the importance of these financial institutions in their economy, they are now devising programs which are set to revive the operations of these institutions. On the other hand, the federal government is blamed of its moves in waging war in Iraq, which lead to investment of much of the United States resources that was sought to purchase the war weapons as well as in terms of human resources among other resources that the federal government had to bear as a result of this war[6].

            The other macroeconomic policy effects were felt on the regulation of the financial institutions, which are said to have had too much discretion in their business operations. The federal government had supported the policies, which enabled the financial institutions to carry out their lending and advisory services to the investors with minimal intervention in their lending decisions. Given that most of these institutions did not have expertise that could enable them pick on informed decisions, a number of them engaged in financial activities that put at risk their investment portfolios[7].

            With the adjustments in the interest rates as well as the federal fund rates, the Federal Reserve had managed to give the tax payers a relatively affordable life at the first instance, but with the increase in the level of money supply there was increased levels of inflation. These policies lead to the interest rates increasing and in turn triggering the increase in the cost of repayment for the mortgages. In the process of it all, the borrowers’ encountered difficulties in meeting their mortgage requirements as the cost had shot up drastically that they could not afford. Finally, the actions that saw the Federal Housing Finance Agencies put into conservatorship put at risk the mortgage sector of the economy, which further lead to the global financial crisis[8].

(b) Describe and evaluate the main macro economic policies used by the American government and the Federal Reserve over the last three years.

            In economics there two types of macroeconomic policies that an economy can implement to stimulate its economic activities. These two policies include the fiscal policy as well as the monetary policy. The Federal Reserve and the government of the United States of America have managed to utilise the two policies in their operations for the last three years[9].

The monetary policy

            The monetary policy in an economy like in the United States of America relates to the various actions of the Federal Reserve, as well as the government agencies undertake that determine the size as well as the growth of the level of money supply in an economy. This is one of the many activities that these institutions are expected to carry out in the economy of the United States of America. The money supply aspect of the monetary policy can be examined from two different perspectives, which are used to assess the level of liquidity in an economy. The Federal Reserve and the government of the United States of America use three mechanisms in controlling the level of money supply in the economy[10].

            The first mechanism is whereby they can purchase or sell the different types of government or treasury securities. In selling these securities the Federal Reserve and the government have an intention of reducing the level of money that is in supply within the economy, because the public will manage to invest in these securities. When the securities are issued to the public, the Federal Reserve and the government intend to increase the level of money supply as individuals will receive money when they offer the securities that they hold to the Federal Reserve. The second mechanism that the Federal Reserve can use to implement the monetary policy is the discount rate adjustments, and finally the control of the reserve requirements. For the past three years some of the monetary policies that the government of the United States of America in conjunction with the Federal Reserve has managed to reduce the [11]

            With the application of the monetary policy, United States of America managed to record positive growth in the gross domestic product. The employment rates also increased. On the other hand, the housing sector registered a boom as the prices of the houses had gone up. The negative effects which resulted from the application of the monetary policy include the increase in the energy prices especially for oil. On the other hand the inflation rates recorded increases with the increase in the price for oil, thus raising the overall costs of conducting business activities. The housing sector of the economy was also affected with the adjustments which were made to the interest rates, this lead to the reduction in the value of the housing investments. Given that most of the mortgage institutions had accepted the use of houses as security for the loans that they were offering, when the housing prices declined the rate of default for the mortgages increased which lead to liquidity problems in the economy that are attributed to the current financial crisis[12].

 The fiscal policy

            the other form of macroeconomic policy which the government of the united states of America in conjunction with the federal reserve has implemented in the last three years comprises of the

The government of the United States of America put the federal housing finance agencies that are the Fannie Mae and the Freddie Mac under conservatorship an idea that they expected that could enable the United States of America to commit that money that the tax payers were remitting to good use. I

the government in most part intervened in the operations of the financial institutions, whereby almost 40% of the profits of the financial institutions was accounted for by the government hoping that the economic crisis which was beginning to crop in would be over within a very short period of time which would then enable the government to make adjustments to their financial regulatory structures. The other measure which was undertaken includes giving the investment banks authority to regulate their business actions. Considering that most of the investment banks were not specialised in the wide range of investment activities that they were carrying out, they took uninformed financial decisions to make investment decisions even in portfolios which were risky that lead to losses and many of them collapsing[13].

            On the other hand the government supported for the moves to repeal the Glass-Steagall act which in most part is attributed to the faulty conditions in the mortgage sector. The government had also in one way or another promised bailout programs for financial institutions which encouraged most of these institutions to undertake risky ventures that resulted to most of them losing in their operations. In addition to that the government encouraged the adoption of the community reinvestment act that is claimed to have lead to the current economic crisis as the provisions of the act enabled the financial institutions to lend to all types of creditors including the uncreditworthy borrowers[14].

            The Federal Reserve in most part is charged with the authority of regulating the monetary policy. In the past three years in the United States of America the Federal Reserve had participated in actions to revive on of the hedge funds an action that made the other financial institutions believe that the Federal Reserve could rescue their operations in cases where they could face financial difficulties. On the other hand there was an issue of the Federal Reserve reducing the rates of interest drastically reducing the cost of borrowing for most of the investors. The federal funds were also reduced from the rates of around 6% to 1%. the intention with which such actions were made was to reduce the effects of the going under of the dot com bubble which had taken place at around 2001 as well ads the to reduce the effects of the terrorist attacks which had been experienced previously. The interest rates were set to be lowered so that as by then the rate of inflation in the economy was relatively low[15].

            During the periods of 2004 to around 2006, the federal reserve raised the level of the federal funds in the economy that lead to an upward shift in the 1 year as well as the 5 year adjustable rate mortgages that made it hard for most of the mortgage holder expensive to repay their mortgages thus leading to high default rates. This has been attributed to the crisis in the housing sector[16].

WORD COUNT 2000

Bibliography

Bernanke B, (February 2006). Semi-annual monetary policy report to the congress. Retrieved online: http://www.federalreserve.gov/newsevents/testimony/bernanke20060215a.htm

Camero, F, (2005). US foreign policy after the Cold War: global hegemon or reluctant sheriff? Routledge.

Kohn, D. (2009). Monetary policy in the financial crisis. Retrieved online: http://www.ritholtz.com/blog/2009/04/monetary-policy-in-the-financial-crisis/

Krugman, P,  Obstfeld, M, (2009). International economics: theory and policy. Addison-Wesley.

Langhammer, R, Vinhas de Souza, L, (2005).Monetary Policy and Macroeconomic Stabilization in Latin America. Springer.

[1]          Bernanke B, (February 2006). Semi-annual monetary policy report to the congress.
[2]          Kohn, D. (2009). Monetary policy in the financial crisis.
[3]          Krugman, P,  Obstfeld, M, (2009). International economics: theory and policy (Krugman and Obstfeld, 2009, p10-120).
[4]          Krugman, P,  Obstfeld, M, (2009). International economics: theory and policy (Krugman and Obstfeld, 2009, p10-120).
[5]          Langhammer, R, Vinhas de Souza, L, (2005).Monetary Policy and Macroeconomic Stabilization in Latin America. Springer (Langhammer and Vinhas de Souza, 2005, p126-300).
[6]          Langhammer, R, Vinhas de Souza, L, (2005).Monetary Policy and Macroeconomic Stabilization in Latin America. Springer (Langhammer and Vinhas de Souza, 2005, p126-300).
[7]          Camero, F, (2005). US foreign policy after the Cold War: global hegemon or reluctant sheriff? Routledge (Camero, 2005, p124- 250).
[8]          Camero, F, (2005). US foreign policy after the Cold War: global hegemon or reluctant sheriff? Routledge (Camero, 2005, p124- 250).
[9]          Camero, F, (2005). US foreign policy after the Cold War: global hegemon or reluctant sheriff? Routledge (Camero, 2005, p124- 250)
[10]        Camero, F, (2005). US foreign policy after the Cold War: global hegemon or reluctant sheriff? Routledge (Camero, 2005, p124- 250)
[11]        Camero, F, (2005). US foreign policy after the Cold War: global hegemon or reluctant sheriff? Routledge (Camero, 2005, p124- 250)
[12]        Camero, F, (2005). US foreign policy after the Cold War: global hegemon or reluctant sheriff? Routledge (Camero, 2005, p124- 250)
[13]        Camero, F, (2005). US foreign policy after the Cold War: global hegemon or reluctant sheriff? Routledge (Camero, 2005, p124- 250)
[14]        Langhammer, R, Vinhas de Souza, L, (2005).Monetary Policy and Macroeconomic Stabilization in Latin America. Springer(Langhammer and Vinhas de Souza, 2005, p126-300).
[15]        Langhammer, R, Vinhas de Souza, L, (2005).Monetary Policy and Macroeconomic Stabilization in Latin America. Springer(Langhammer and Vinhas de Souza, 2005, p126-300).
[16]        Langhammer, R, Vinhas de Souza, L, (2005).Monetary Policy and Macroeconomic Stabilization in Latin America. Springer(Langhammer and Vinhas de Souza, 2005, p126-300).