Contradictory Effects of Monetary and Fiscal Policies on the Economy of Usa

Only available on StudyMode
  • Download(s) : 350
  • Published : June 27, 2010
Open Document
Text Preview
CONTENT

1. INTRODUCTION 3

2.MONETARY AND FISCAL POLICIES OF THE USA 3

3.REASONS FOR CONTRADICTORY CONSEQUENCES 5

4.IMPACT ON THE BANKING SYSTEM 7

5.IMPACT ON CITIBANK 8

6.RECOMMENDATIONS 9

7.CONSEQUENCES 10

8.REFERENCES 11

EXECUTIVE SUMMARY

The global economic downturn, the sub-prime mortgage fiasco, investment bank collapses, falling shares and home prices, and tight credit pushed the United States into a recession by end 2007.In response to which the Federal Reserve, Treasury, and Securities and Exchange Commission responded with unprecedented , monetary policy expansion, fiscal stimulus and financial institutional bailouts intended to create employment, promote investments and combat slumping consumer spending. However these policies have had useful as well as contradictory results in their outcomes. The following report discusses various monetary and fiscal policies, reasons for the contradictory consequences ,impact of these policies on the banking sector for e.g. how banks started hoarding and investing money in securities instead of lending out to businesses, and how Citibank in particular has been impacted. The report concludes with a number of recommendations to address the challenges of debt management, dismal unemployment rate and the crisis of the banking sector.

1 INTRODUCTION

The global economic downturn, the sub-prime mortgage fiasco, investment bank collapses, falling shares and home prices, and tight credit pushed the United States into a recession by end 2007.(National Bureau of Economic Research ).

Figure 1 United States GDP Growth Source : CIA World Book Fact Sheet

As shown in figure 1,the GDP rate started to deteriorate in 2007 ,and by Jan 2009 it had slumped to -6.40 .Unemployment rate also reached a staggering 10% thus forcing Government and the central banks Federal Reserve to respond with unprecedented , monetary policy expansion, fiscal stimulus and financial institutional bailouts intended to create employment, promote investments and combat slumping consumer spending as discussed below.

2 MONETARY AND FISCAL POLICIES

1) Economic Stimulus Act of 2008-.

This stimulus package, projected at $152 for 2008 was passed in February 2008.It includes tax rebates for American Low and middle income households, tax stimulus for businesses to invest, and an increase in the size of home mortgage loans that the Federal Housing Administration (FHA) can insure and that the government sponsored enterprises Fannies Mae and Freddie Mac can purchase.

2)Troubled Asset Relief programme -
In order to address the subprime mortgage crisis, one of the first and most significant monetary measure was TARP. Congress allowed the United States of the Treasury Department to inject $700 billion dollars into banking industry to buy illiquid, difficult-to-value assets from banks and other financial institutions so that they could start lending again.

3) American Recovery and Reinvestment Act of 2009- In January 2009 the US Congress passed and President Barack OBAMA signed a bill providing an additional $787 billion fiscal stimulus to be used over 10 years. It contained a number of spending and tax measures to inject more aggregate demand and to increase consumer spending thereby boosting employment and the economy. The Act includes federal tax cuts, expansion of unemployment benefits and other social welfare provisions , and domestic spending in education, health care, and infrastructure, including the energy sector. A detailed composition of the package is as presented below.

4.)Operational Procedures to Influence the Federal Funds Rate Monetary Policy Changes in 2008/2009

Thus against the backdrop of further deteriorating economy and the market On December 16, , the FOMC established a target range for the federal funds rate of 0 to .25 percent, the lowest...
tracking img