by Vanshita Chandwani
The only ray of hope for the masses in 2008 was the government. Due to the central banks’ massive monetary stimulus packages the stock markets were able to rise up again.
With relatively smaller working capital, the banks could never absorb the shock of such a loss as was posed by the financial crisis of 2008.
The global economy had obviously taken a hit due to the saving glut worldwide, sending US Treasury yields plummeting.
Despite all the measures, it is fair to say the crisis still takes away a part of Europe’s economy after the implementation of post-crisis austerity policies.
This raised further questions regarding the sustainability of free markets and capitalist ideals.
Recovery from the crisis and an attempt to avert its reoccurrence required regulation. Government intervention was necessary to manage potential risks of future and existing investments.
Without an enormous bailout from the government, the world would have most definitely moved into another wave of the Great Recession.
What essentially saved the world economy was large public spending - as is the case in any crisis.
The Recession was marred by unemployment, steep falls in profit for firms, pay cuts, falling consumption rates, and depreciation of shares.
The five measures in terms of Policy that the US took namely were:
● The Troubled Asset Relief Program in 2008 ● Economic Stimulus Act in 2008 (ESA) ● Public Private Investment Program (PPIP) ● American Recovery and Reinvestment Act of 2009 (ARRA)
● The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010
Owing to the absence of liquidity, these policies primarily aimed at circulating the much needed cash in the economy, also known as quantitative easing.
In the hopes of boosting demand, the government had reduced the taxes imposed on households in order to allow for them to have more disposable income.
The government kept the public expenditure high despite fears of large fiscal deficits. This generated employment and kept money in circulation. Unemployment benefits were granted.
The government bailed not only individuals but also huge firms out of debt. Unprecedented policy of buying risky assets was adopted by the government.
The large financial institutions were made to raise their capital and those that could not were acquired by stronger firms. Tax rebates accompanied by investment incentives were sent to low income families under ESA.
The government also followed a policy of quantitative easing. It bought glits (government issued bonds) in the market to inject the missing liquidity.
The Treasury injected $205 billion into 707 financial institutions across 48 states in 2008. The government started working in collaboration with the private sector to boost the prices of assets to lift the securitization market under PPIP.
A fresh $712 billion were injected into the economy with the implementation of ARRA after the colossal collapse of Lehman Brothers. This was to stabilize the remaining financial institutions.
The G-20 leaders had their first ever summit and infused their economies with significant monetary stimulus packages. They relied on IMF, along with their central banks, for fiscal expansion.
These initiatives were essential since they were the only thing that could allow production houses to produce, and banks to lend. It goes without saying, however, that these stimulus packages came at a cost.
The global debt levels for governments did rise far higher than ever before. But if not for these measures, the world’s institutions would collapse.
In times of such crisis, we turn to the central bank and the government for economic stimulus and public expenditure. But then again, how much stimulus is enough?
In the current scenario, each government faces challenges of unemployment and hefty overheads with production stagnant at virtually zero.
There is a greater challenge posed by the threat of the virus and the ever growing medical expenditures.
While the government is literally our only knight in shining armor, resources continue to be limited.
This is an important lesson we must take as we prepare ourselves for excess demand in the economy leading to inflation, and higher fiscal deficits than ever before.
REFERENCES: 1) https://treasury.gov.au/speech/the-global-financial-crisis-and-the-road-to-recovery 2) https://blog.euromonitor.com/the-recovery-from-the-global-financial-crisis-of-2008-missing-in-action/ 3) https://www.americanprogress.org/issues/economy/news/2012/05/29/11593/10- reasons-why-public-policies-rescued-the-u-s-economy/