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A Look Into the Monetary Policies During the Great Recession and the Great Depression - Part 16


8 Impact of the Great Recession on the US and World Economies

The Great Recession is rightly named so because of its high magnitude. In fact, it is the second biggest economic downturn in history after the Great Depression, and the biggest one during the post-war period. Though there were other economic downturns such as the one that took place in 1973 due to oil crisis, 1981-82 and 2000s, the great recession was much higher in terms of its magnitude and its lasting effect. Though the recession officially ended in 2009, its effects are being felt even today. The effects of the recession are still unfolding, so the exact nature of its impact is still unknown.

Below are some areas where the great recession has impacted the US and the world economy so far.

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8.1 Labor Displacement

From May 2007 to October 2009, the unemployment rate went on a spiraling mode as it rose from 4.4 percent to 10.1 percent, by the time the recession ended. As a result of this spike, more than 7.5 million people lost their jobs, and it plunged several American families into financial hardships. Around the same time, the long-term unemployment rate also shot up. It is estimated that by 2010, more than 40 percent of people who were unemployed had been looking for a job for more than six months. This long-term unemployment rate occurred because the economy had not picked up steam, so it was not able to generate jobs for those who were unemployed.

The above numbers also meant that many workers felt discouraged, and they eventually drew out of labor force, while others worked part-time though they were willing to work full-time. The existing unemployment statistics do not reflect these situations, which means, the rate of unemployment would have been much higher when the above factors were also taken into account. When these numbers are also considered, the actual unemployment rates hover around 18 percent (Blinder and Zandi, 2010). These high rates caused massive levels of labor displacement, not seen during earlier recessions.

8.2 Greater Role for the Government

While the Great Depression increased the role of the government within the economy, the Great Recession took this involvement to new levels. The financial crisis coupled with the housing bubble burst put the economy in a precarious condition. There were no funds to circulate, and many companies lost their market capitalization. Unemployment levels were high, and there continued to be immense financial suffering for the people in US. To mitigate this condition, the government believed its intervention was necessary, so it took a multipronged approach to deal with the economic problems that prevailed in the economy.

In the first phase, the government purchased equities of different financial institutions that were facing a severe crunch. When the housing bubble burst, these institutions had many toxic assets that they could not sell. This created a liquidity crisis and a general panic situation. To prevent the economy from going into a depression, the Fed believed it had to take some steps. The first measure it took was to save Bear Sterns from a possible collapse. Later, Freddie Mac and Fannie Mae were taken over by the government, and it became a quasi-government company. When Lehman Brothers went into bankruptcy, a massive panic set within the economy. To assuage these investors, the government nationalized insurance provider AIG.

However, at this point, liquidity simply froze within the economy, and in response to this freeze, the stock market crashed. Therefore, the government intervened again with the Troubled Asset Relief Program (TARP) which was aimed to keep financial institutions solvent by purchasing their equities and troubled assets.  These first responses showed how the government had taken the lead in trying to restore the economy. Irrespective of the effects of such actions, the fact that the government decided to enter aggressively within the country's economy goes to show how the role of the government had extended way beyond mere governance.

In the second phase, the government worked to correct the labor-market consequences of the recession. In February 2009, the US Congress passed the American Recovery and Reinvestment Act (ARRA) which was a stimulus package that turned to be a fiscal relief for state governments. Under this Act, the federal government gave funds to provide tax cuts for households and to boost investments in infrastructure and technology. With this Act, many families and businesses got the much needed funds needed to stimulate the economy. The government believed that such measures would increase the money available in the hands of the public, that in turn, would lead to more spending. This increased spending would lead to an increase in the production of goods and services, that would augur well for the economy as a whole.

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Other than this stimulus package, President Obama also signed into law another major law called the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The idea behind this Act was to extend the tax cuts that were available for individuals and businesses. It also made provision for emergency unemployment compensation for individuals.

The key aspect in these initiatives is the big role that the government played in boosting the economy. The fiscal deficit is also another aspect that is looming large over the future generations. In the light of this background, did the government do the right job by intervening so heavily to rectify the economy?

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