The Effectiveness of the Measure Done by the Government for Lehman Brothers in 2008
The modern era has witnessed a number of financial crises that have had an effect on economic functions in many countries. The economic turmoil in Japan and Hong Kong after 1990 and 1997 respectively and the global financial crises of early 21st century are some examples of recent crises in history. Governments worldwide play a central role in managing economic environments to either avert or mitigate the effects of financial crises.
Fiscal policy and monetary policy are the main tools that the government seeks to correct economic turmoil. In light of the frequency and effects of financial crises within the last and present centuries, various governments have adopted better steps in managing prevailing economic conditions. This has included reinventing fiscal and monetary policies and practices to improve monitoring and control of economic activities, provide frameworks on preparedness and recovery and offer financial aid to mitigate the effects of economic crises.
The 2008 financial crisis tested the financial structures of the US financial markets. Ideally, the epicenter of the crisis was the US Mortgage markets. The government decided on a stimulus program which aimed at increasing the money supply to ease credit in the market (Pariente, Bora & Omar, 2011). The objective of this stimulus program was to trigger investment through ensuring that institutions and individuals who require credit are able to obtain from commercial banks. This program was quite successful. However, it faced serious objections from the Republican Party. In this regard, the federal government opted to use US treasuries to pay for the massive fiscal stimulus programs. The 2008 financial crisis in the US and increased government spending as part of recovery was fundamental in demonstrating facilitated economic recovery through deliberate fiscal policy by the federal treasury.
Notably, the government was justified in using the counter cyclical monetary policy towards reducing the volatility of the macroeconomic risks to rescue the economy (Pariente, Bora & Omar, 2011). Notably, aggressive monetary policy employed by the US treasury was effective in lowering interest rates hence tackling the spread of available credit. The US treasury provided $6.4Trillion dollars in liquidity using quantitative easing rather than using US treasury issuing debt option which is considered controversial. It is notable that the US treasury committed $4.65Trillion in recapitalizing various big corporations to save them hence stimulating the economy. This measure was very effective in saving the economy. The government decision to introduce Troubled Assets Relief Program (TARP) was a tool that significantly saved the US financial markets. In this regard, TARP aimed at injecting capital into four major commercial banks to save them from insolvency. TARP was introduced by Treasury Secretary Henry Paulson to purchase toxic assets. TARP injected capital of $239.5 billion to about 35 financial institutions estimated to earn the government 5% dividends (Gaby & David, 2011). Incidentally, mortgage industry had loaned home owners under the misconception that house prices would increase hence they would refinance the loans (Gaby & David, 2011). Ideally, during the crisis, householder’s wealth valued at $10 Trillion was under threat following underestimation of risks and excessive lending to individuals who never qualified to purchase houses (Pariente, Bora & Omar, 2011).
There are some suggestions that were made to avoid future financial crisis. For instance, it was suggested that the government should increase capital requirements for financial institutions to enable them to cushion themselves from financial crisis hence facilitate solvency (Gaby & David, 2011). In response to the 2008 financial crisis, the government monetary policy directed the increased spending through the injection of $787 billion economic stimulus program. The expectations were that the US fiscal budget for 2010 would have a $1.2trillion deficit relating to the efforts of mitigating the 2008 financial crisis. Notably, US global partners gave the US financial assistance to overcome the crisis. For instance, on 2nd April 2009 the global largest economies decided to offer the US $1.1trillion to stabilize the economy (Leightner, 2011). This money included $750 billion from IMF, $40 billion from China and $200 billion from both Japan and Europe each contributing $100 billion. This money was quite essential in financing the stimulus program and the TARP.
There is a significant impact to government spending on recovery from economic turmoil. Analysis of the Japan 1990 response to a decade of continuous deflation indicates that the government fiscal policy is essential in overcoming economic meltdown. Cutting government expenditure brings about negative real impact compared to increasing government spending during Japanese 1990 decade of deflation (Leightner, 2011). On the other hand, increasing government spending is effective in triggering multiplier effect which triggers economic recovery. However, this was not the case for recovery of China in 1997 and Japan in 1990. In both instances, increased government spending resulted into a multiplier effect that negatively affected the economic recovery. In this regard, increased government spending fled to downturn of Japanese and China economies. For instance, the People’s Republic of China in recovery from the 1997 Asian financial crisis relied on this concept (Leightner, 2011). Economic scholars argue that increased government spending is vital in assisting towards economic recovery. For instance, in the 2009 budget both the house and the senate had passed $3.5 trillion in increased government spending which represented 227% increased federal government expenditure (Leightner, 2011). The impact is inflation that would counter increased government spending which would otherwise reduce deflation. This policy of increased government spending is necessary in triggering economic recovery. Notably, it is only in 1951 when the US government made increased government spending close to the 2008 increased government spending.
In conclusion, fiscal and monetary policy employed to facilitate economic recovery depends on the situation at hand. For instance, increased government spending aided greatly the recovery of the US economy in 2008 financial crisis. On the other hand, increased government spending negatively influenced the economic recovery of China’s economy in 1997 and Japanese economy in the 1990 decade of deflation. As observed, the US government increased spending aimed at facilitating low interest rates and as well availing credit to enable institutional and individual investment. The objective was to ensure increased supply of money to the economy. Moreover, the government injected capital to a number of corporations to save them from insolvency through TARP. Finally, the 2008 increased government spending is an example of how increased government spending can aid financial crisis recovery.
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