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The economic problems

The economic problems that are plaguing the United States economy at the present are numerous to say the least. Since the collapse of the Housing market, the United States has experienced what some have come to call an economic recession. While it remains to be seen if the United States economy is really undergoing a recession at this point in time, this situation can be used as a great opportunity to point out the current struggles of the American economy.

The much touted and highly publicized US $700 billion bailout plan is argued to be good for the economy as a “quick fix” to the problem yet there are a number of economists who feel that the real solution to the problem lies in establishing more solid fiscal and monetary market fundamentals. In order to arrive at a better understanding of this problem, the main reasons for the collapse of the American Economy must first be examined because any solution that is provided must deal with the foundations of the problem.

The fundamental flaws and structural weaknesses of the American economy are not only more visible now but also more potentially damaging. The current weakness that the American currency is experiencing coupled

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with the exponential increase in oil prices may have arguably not placed the country into recession but have brought its economy pretty close to it. As such, this brief discourse will try to examine what brought about this economic collapse by identifying the present economic threats to the United States; namely, Pension Underfunding, Public Debt, Overbuilding in Calamity prone areas, Retirement and Social Security and Energy.

The question on whether or not the US $700 billion stimulation package for the United States economy will be effective depends on so many different factors. The first criterion that must be examined is whether or not there really is a recession and therefore the need to introduce a new economic stimulus package. As shown in recent reports, the United States economy has indeed taken a hit from the collapse of the subprime market. This has led to a loss of jobs and a slowdown in economic growth. This shows that there indeed may be a basis for the introduction of a stimulating package.

The second, and perhaps more essential question, is on whether or not the stimulus package is enough. In order to address this question, it is relevant to examine the limitations and effects of the introduction of such a package. At present, the economic slowdown has resulted in loss of jobs and ultimately lower revenues for the United States government. The reduced demand for US backed treasury bills and securities also means that the Government is constrained with respect to the size of the economic stimulus package that it will release.

The projected loss of jobs and increase in unemployment rate is not necessarily affected by any economic stimulus package. This is the reason why the question on whether or not the package should be higher is not really relevant. Loss of jobs can be attributed to the economic fundamentals of the United States economy such as the shift in production facilities to other countries. This is not necessarily a function of the current recession that the United States economy is experiencing but instead a result in the lack of solid economic fundamentals over the years.

Assuming that the package will indeed have the intended effect, the hands of the United States government are also tied down by budget constraints. The treasury department can only allocate and release so much funds and this may or may not be the amount needed to effect that changes that many have proposed. The basic economic principles from the Keynesian era dictate that changes in the monetary and the fiscal policy directly impact inflation and unemployment. The reason for this is that an increase in money supply means that there is more currency in the market.

This in turn leads to more spending which drives up the prices of goods. This can be understood in the context of basic supply and demand. This relation to unemployment, however, is quite different and may depend on many factors. Simplistically speaking, however, unemployment can be reduced by a change in either monetary or fiscal policy that encourages the growth of small to medium scale businesses. By decreasing interest rates, the money supply increase thus allowing individuals and firms more access to capital that is need to run their own businesses.

So while current theories show that monetary and fiscal policies may indeed impact inflation and unemployment, such is not always the case in certain situations as shown in the example provided. The basics such as solid economic fundamentals must always be considered when looking at the impact of such changes to see if they can really attain the desired effect. In an effort to address the economic problem, there have been plans by the Federal Reserve and the National Treasury to increase the money supply in the market.

One of these policies is the voluntary capital purchase program. It is aimed at selling preferred shares of stock to the United States Government on favorable terms that afford the maximum amount of protection to the taxpayer. Another policy that has been implemented is the systematic risk exception under the FDIC Act which grants the FDIC the power to guarantee, on a temporary basis, the senior debt of all FDIC insured institutions. The third policy that has been announced is the increased access to funding for all of the businesses in various sectors of the American economy.

The goal of this is to stimulate economic growth on a micro level in order to develop solid economic fundamentals that can help resuscitate the economy. Other steps that the Federal Reserve and the National Treasury have taken include the strengthening of capital position and funding ability of American Financial Institutions. These are to be achieved through multilateral agreements such as the reciprocal currency arrangement (Swap Lines) with International Central Banks.

Finally, the heralded US $700 billion bailout plan that was recently enacted into law has also been designed to infuse much needed capital into the market and to protect the exposure of several multinational and local financial institutions. Another important point to resolve is the opportunity cost involved with such a stimulus package. The US $700 billion bailout is a direct infusion into the market. It will be used to set-off all the Non-Performing Assets that the financial institutions have as well as insure the other debts that have been incurred.

Instead of providing a financial injection, one alternative is the creation of jobs and business through the supply of money in the market. By creating a level of credit and liquidity in the market, the US $700 billion bailout package can become more effective in the long run by creating jobs and new businesses. This presents a more sustainable development program. The real solution to the problem would therefore be a combination of all of these proposed plans and not only the US $700 billion bailout plan.

The Federal Reserve and the National Treasury have also teamed up to deal with this global economic crisis by instituting several reforms and policy changes. With the goal of providing an immediate and permanent solution to the problem, the Treasury, with the help of the Federal Reserve, has instituted several plans designed to not only provide permanent solutions but has also provided a way through which the US $700 billion can be used as not only as a bailout plan but as the foundation for solid economic framework for years to come.

References:

Davidson, Scott. (2003). Economics: Perfect Competition and Monopolistic Competition. 2nd Series. Bantham Books: 103-105. Davis, K. (2003). The costs and consequences of being uninsured. Retrieved February 4, 2008, from http://www. cmwf. org. Stone, Diane. (2007) “Market Principles, Philanthropic Ideals and Public Service Values: The Public Policy Program at the Central European University”, PS: Political Science and Politics, July: 545—551

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