Demand-side Policies and the Great Recession of 2008

Demand-Side Policies and the Great Recession of 2008
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Demand-Side Policies and the Great Recession of 2008
Introduction
The 2007/2008 global financial crisis threatened the economic fortunes of many countries around the world, thus resulting in the Great Recession. Recession is associated with an extensive decline in spending where overall business activitiy in on the decline. Generally, economic recession refers to a period where the overall economic activity is on the decline, and is associated with the general plummeting of the stock market, a drop in the housing market, and rising unemployment. Following the 2008 Great Recesssion, the federal government undertook several fiscal and monetary policy measures to promote recovery from the recession.
Fiscal Policy
Fiscal policy involves employing various forms of government spending and tax cuts with an aim of increasing demand as well as total output to folster recovery. The federal government implemented fiscal stimulus packages which involved a mix of increases in government spending and tax cuts with the aim of stabilizing the country’s economic activity and inflation by invigorating addregate spending (Carvalho, Eusepi & Grisse, 2012). The first fiscal policy response to the Great Recession was the Economic Stimulus Act of 2008 which provided tax rebates and business tax reductions to reduce the impact of the onset of recession, which increased the federal deficit by approximately $152 billion in 2008 (Poole, 2010). The initial fiscal policy response intended to increase aggregate consumption as well as improve the general economic activity.
While the initial fiscal response made a modest contribution in increasing consumption, the minimal impact on economic stability created was shortlived. In the subsequent year, the American Recovery and Reinvestment Act of 2009 (ARRA) was enacted, appropriating an additionall $787 billion (Poole, 2010). The second fiscal response included “$288 billion in tax cuts and benefits to individuals and firms, $275 billion in contracts, grants, and loans, and $224 billion in entitlements” (Tcherneva, 2011, p.5). Notably, the latter also included the enactment of the emergency unemployment program, the longest in history, as well as supplementing the Temporary Assistance to Needy Families program with emergency funds (Tcherneva, 2011). The exapansionary fiscal policy aimed at increasing the growth of GDP as well as promoting employment.
Another fiscal response was the enactment of the first Troubled Asset Relief Program (TARP) which aimed at providing strong guarantee for troubled mortgage assets on banks’ books. The Congress passed the $700 billion TARP bill, with the funds being infused into General Motors and Citigroup (Tcherneva, 2011). In effect, the US treasury used the approved TARP funds to strengthen the bank capital by purchasing senior preferred stock, thus attaining a semi-ownership position in banks without any dilution effect on the common shareholders (Poole, 2010). The goal of the TARP was to ensure that bank balance sheets were stable, allowing flow of credit to promote financing investment.
Monetary Policies
The Federal Reserve implemented various measures that aimed at enhancing credit support. After the collapse of the Lehman Brothers,the Federal Reserve undertook unconventional monetary measures, known as credit easing, with the objective of stabilizing certain segments of financial systems (Solt, 2018). The Federal Reserve started its quantitive easing (QE1) prog...