The Great Recession was the most serious economic downturn in U.S. history since

Question

The Great Recession was the most serious economic downturn in U.S. history since the Great Depression. The recession began in December 2007. Interest rates at the time were very low, close to zero. Despite the American Recovery and Reinvestment Act of 2009, a nearly $800 billion fiscal stimulus and an expansionary monetary policy, the economy is only now getting back to normal in 2015.

In retrospect, what set of macro policies, if anything, should we have conducted to achieve a better recovery? Explain your reasoning. Be sure to address the arguments favoring active versus passive policymaking as they relate to your discussion.

Explanation / Answer

The most important factor that led to the fall of the US economy was the sub-prime crisis or the housing bubble which was prevalent in the years preceding to the recession in 2007. The housing bubble was present in the system from 2004-2007 and when the bubble burst in 2007, it lead to a recession

Hence it is necessary to prevent these kinds of bubbles in the economy rather than change the monetary policy when the bubble bursts. Hence it is mandatory to make sure that companies like Fannie Mae and Freddie Mac do not sell securitized junk home loans to companies like Lehman brothers which led to the fall of the latter in the economic collapse.

I believe tweaking the monetary policy and measures such as quantitative easing will only acts as remedy to the problem. I believe preventing the problem is much more necessary than curing it when it has already occurred.

Hence in conclusion, I would not alter the long term money and fiscal policies because of crises and take steps to prevent such crises in the future.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.