- Congress has given the Federal Reserve a dual duty to preserve full employment and price stability in the US economy.
- During recessions, the Fed uses a variety of monetary policy tools to assist lower unemployment and re-inflate prices.
- Open market asset purchases, reserve regulation, discount lending, and forward guidance to control market expectations are some of these strategies.
- The majority of these measures have previously been used extensively in response to the economic hardship created by current public health limitations.
How did the federal government deal with the economic downturn?
During times of national crises, Congress has responded by directing federal resources and programs to help struggling Americans. While it is critical to respond rapidly to crises, it is also critical to ensure that federal programs and public resources are used as intended.
The GAO’s involvement during times of crisis is examined in today’s WatchBlog piece, which focuses on the federal response to the Great Depression, the Great Recession, and the coronavirus outbreak.
When the stock market crashed in 1929, precipitating the lengthy period of economic decline known as the Great Depression, GAO was still a relatively young organization.
In reaction to the Great Depression, Congress passed President Franklin D. Roosevelt’s New Deal, which included $41.7 billion in funding for domestic initiatives such as unemployment compensation.
GAO’s workload grew as federal funds were poured into the 1930s’ recovery and relief efforts. GAO, which had around 1,700 employees at the time, quickly ran out of employees and needed to hire more to handle paperwork such as vouchers. Our staff had nearly tripled to 5,000 by 1939.
Our auditors began extending their involvement in overseeing federal programs at the same time. Fieldwork in Kentucky and numerous southern states began in the mid-1930s, and included examinations of government agriculture programs. This steady shift in goal from acting as federal accountants to serving as program and policy analysts would last until 2003, when the General Accounting Office was renamed the Government Accountability Office.
The Great Recession, which began in December 2007, was widely regarded as the country’s worst economic downturn since the Great Depression.
As a result, Congress passed the American Recovery and Reinvestment Act of 2009, which contained $800 billion in stimulus funding to help the economy recover.
GAO was given a number of tasks under the Recovery Act to help enhance accountability and openness in the use of those funds. For example, we conducted bimonthly assessments of how monies were spent by various states and municipalities. In addition, we conducted specialized research in areas such as small company loans, education, and trade adjustment aid.
Despite the fact that the Great Recession ended in 2009, we are still investigating its effects on the soundness of our financial system and related government support. For example, in response to the 2008 housing crisis, the Treasury Department established three housing programs utilizing TARP funds to assist struggling homeowners avoid foreclosure and keep their homes. TARP programs were assessed every 60 days during the recession and subsequent years, and we proposed steps to improve Treasury’s management and use of funds. This effort continues today, with annual audits of TARP financial statements and updates on active TARP projects. In December 2020, we released our most current report.
We’re also keeping an eye on the health of the nation’s housing finance system, which includes Fannie Mae and Freddie Mac, which buy mortgages from lenders and either hold them or bundle them into mortgage-backed securities that can be sold.
Fannie Mae and Freddie Mac were taken over by the federal government in 2008, and the role has remained unchanged for the past 13 years, keeping taxpayers on the line for any possible losses sustained by the two corporations. We wrote about the dangers of this prolonged conservatorship and the need to overhaul the home finance system in January 2019.
Congress approved $4.7 trillion in emergency funding for people, businesses, the health-care system, and state and municipal governments in response to the pandemic. We’ve been following the federal response by, among other things, providing reports on the pandemic’s and response efforts’ effects on federal programs and operations on a regular basis.
Vaccine development and distribution, small business lending, unemployment payments, economic relief checks, tax refund delays, K-12 and higher education’s response to COVID-19, housing protections, and other topics have all been covered in our work.
On July 19, we released our most recent report on the federal response, as well as our recommendations for how this effort might be improved further. In October, we will publish our next report. Visit our Coronavirus Oversight page often because we’ll keep you updated on the federal reaction to COIVD-19 as the situation unfolds.
GAO has played a key role in overseeing federal expenditures and programs during times of crisis, and we continue to do so in more normal times. We produce hundreds of reports each year and testify before dozens of congressional committees and subcommittees on problems that affect our country. We saved taxpayers $77.6 billion in government spending in fiscal year 2020. For every dollar Congress invests in us, we get $114!
During a recession, what does the government do?
- The use of government spending and tax policies to impact economic circumstances is referred to as fiscal policy.
- Fiscal policy is largely founded on the views of John Maynard Keynes, who claimed that governments could regulate economic activity and stabilize the business cycle.
- During a recession, the government may use expansionary fiscal policy to boost aggregate demand and boost economic growth by decreasing tax rates.
- A government may follow a contractionary fiscal strategy in the face of rising inflation and other expansionary signs.
What can the federal government do to alleviate the recession?
Governments adopt expansionary fiscal policies to boost the economy’s production. When there is a recession or to avoid a recession, they utilize expansionary policies. Fiscal measures that are expansionary either boost government expenditure or reduce taxes.
How did people react to the Great Recession?
Lessons for Macroeconomic Policy from the Great Recession’s Policy Challenges Eskander Alvi edited the piece. W. E. Upjohn Institute for Employment Research, Kalamazoo, MI, 2017, 137 pages., $28.32 hardback
The collapse of the U.S. housing market in 2007 triggered a series of negative economic events, including a financial crisis, high unemployment, a weakening international economy, and, ultimately, the Great Recession of 200709, the greatest post-World War II economic disaster. The housing bubble burst as a result of banks’ aggressive lending, easy credit, and mortgage securitization. The practice of pooling and repackaging financial instruments, such as mortgages, and selling them to investors is known as securitization. Lenders would securitize and sell mortgages after making loans to home buyers, obtaining more capital for lending. The subprime mortgage crisis predicted the ensuing upheaval in the banking system, most notably Lehman Brothers’ demise. Because so many industries were affected by these developmentsand because the global economy is so intertwinedthe consequences were disastrous.
Editor Eskander Alvi and his team of economists examine the tactics employed by policymakers to tackle the Great Recession in Confronting Policy Challenges of the Great Recession: Lessons for Macroeconomic Policy. Alvi forecasts the recession’s devastating economic impacts in the book’s first chapter, including huge layoffs, unpredictable financial markets, investment cutbacks, and a sinking gross domestic product. In reaction to the crisis, which resembled the Great Depression, authorities attempted to build on what had succeeded in the 1930s while also correcting what had gone wrong. Despite the fact that the Great Recession did not approach the depths of the Great Depression, it was followed by a delayed recovery and policy mistakes in fiscal and monetary policy. Alvi and his coauthors analyze the triumphs and failures of legislators who dealt with the crisis and its aftermath, the reasons for the adoption of various fiscal and monetary policy measures, and the elements for the slow recovery throughout the book.
In the aftermath of the Great Recession, the Great Depression loomed big. Emergency aid in the form of bank bailouts, as well as fiscal stimulus, were top priorities. Many common anti-recessionary policies were implemented by Congress, including tax cuts and increases in unemployment insurance and food stamp payments, which helped to prevent the crisis from extending further. Despite reaching an exceptionally high rate of 10%, unemployment was still significantly lower than the 24-percent rate seen in the 1930s. While Congress’ response to the recession was better in many ways, it also replicated several previous policy blunders. The authorities’ decision to let Lehman Brothers fail, according to one of the book’s writers, was the “one incident that most undermined the stability of global financial markets.” The choice was similar to Henry Ford’s decision to let his Guardian Group of banks to fail in the 1930s, and both incidents wreaked havoc on the financial markets. In 2010, Congress passed the DoddFrank Wall Street Reform and Consumer Protection Act in an effort to regulate lenders and safeguard customers, although this policy didn’t go nearly as far as the GlassSteagall Act, which was passed during the Great Depression. The fact that the worst-case scenario was avoided may have deterred Congress from taking additional steps to boost the economy and regulate the financial sector. Another possible contributor was public pressure on politicians as the country struggled to negotiate its way out of the recession. As Eichengreen points out, public criticism frequently influences policy decisions due to the “dominance of ideology and politics over economic research.”
After repeated criticism of the bank bailouts and mounting concerns about the national debt, fiscal stimulus came to an end. Given the severity of the recession, the lack of enthusiasm for additional fiscal policy intervention resulted in a substantially slower recovery. This inaction was the “single worst miscalculation in macroeconomic policymaking following the financial crisis in 2008,” according to Gary Burtless, who wrote one of the book’s chapters. In a similar spirit, authors Laurence Ball, J. Bradford DeLong, and Lawrence H. Summers contend that to supplement the Federal Reserve’s (Fed) attempts to raise aggregate demand, a more aggressive fiscal policyprimarily more tax cuts and government expenditure on public projectswas required. Despite popular belief that expansionary fiscal measures increase the national debt and exacerbate the problem, the authors argue that, during a recession, such programs increase the national debt in the short run but have no impact in the long run due to increased employment and output. As a result, fiscal contractions during recessions exacerbate the debt problem, prolonging the economic downturn. In the end, public pressure restricted fiscal policy during the Great Recession in numerous ways.
The Fed attempted to fill in the gaps created by the current fiscal policy discussion. Many economists feel that the country’s initial financial threat was larger during the Great Recession than it was during the Depression. Recognizing the gravity of the situation, the Fed made a conscious effort to avoid the errors of the 1930s. It lent large sums of money to foreign banks and nonbank institutions such as broker-dealers, money market funds, and buyers of securitized debt to keep credit flowing and boost consumer confidence. With the federal funds rate already near zero, the Fed used large-scale asset purchases to further slash intermediate- and long-term interest ratesa strategy known as quantitative easing. The Fed also utilized forward guidance, stating that interest rates will remain at zero for the foreseeable future. Interest rates have been lowered and asset prices have risen as a result of these efforts, according to most experts. According to the authors, the Fed was nevertheless under to the same forces that prohibited the implementation of new fiscal policy measures, albeit to a lesser extent. Some detractors argued that central bankers had no place in the mortgage-backed securities market, while others warned of hyperinflation. The Fed chairman at the time, Ben Bernanke, attempted to explain the Fed’s actions to Congress and the public, with mixed results. In order to show its independence, the Fed began decreasing its balance sheet sooner rather than later, ignoring the Depression’s lesson. Nonetheless, the authors believe that the Fed aided the economy in avoiding the worst-case scenario by implementing new monetary policy measures that can be depended on in future downturns.
Any reader interested in learning more about the Great Recession can benefit from Confronting Policy Challenges of the Great Recession: Lessons for Macroeconomic Policy. The book describes how Congress, the executive branch, and the Federal Reserve responded to the crisis, as well as the obstacles they encountered. The writers support their argument with historical comparisons (mostly to the Great Depression), visual aids such as charts and graphs, and a wealth of relevant data. While the book delves into a variety of complex economic issues, it is accessible to all readers.
What was the government’s response to the 2008 financial crisis?
19 President Bush enacted a $168 billion program of federal spending and temporary tax rebates in February 2008 as the first significant federal reaction to the crisis.
20
The Housing and Economic Recovery Act (HERA) of July 2008, which addressed the subprime mortgage crisis, was the second major reaction. It allows the Federal Housing Administration to guarantee up to $300 billion in new 30-year fixed-rate mortgages for subprime borrowers if commercial lenders write down principal loan balances to 90% of current home appraisal values. By strengthening controls and investing capital into Fannie Mae and Freddie Mac, HERA was meant to restore confidence in these organizations. States were given permission to use mortgage revenue bonds to refinance subprime loans. HERA also created a $6 billion Neighborhood Stabilization Fund to assist local governments in purchasing repossessed houses. However, more than $1 billion of these monies remained unspent as of July 2010, and the federal government may revoke them. Part of the difficulty was a lack of clarity about the laws, but a bigger issue was that towns couldn’t buy foreclosed properties as quickly as private corporations could. The US Department of Housing and Urban Development (HUD) introduced a First Look program in September 2010, giving towns a 48-hour head start on purchasing foreclosed properties at a 1% discount. Banks, on the other hand, are unlikely to offer many of their foreclosed houses to the program.
21State housing finance agencies have long provided low-cost housing loans without the foreclosure issues that come with federally supported subprime loans. Fannie Mae has recently stepped in to assist in the funding of an Affordable Advantage effort based on state programs. Idaho, Massachusetts, Minnesota, and Wisconsin are the only states that have signed on so far.
22The Troubled Asset Relief Program (TARP) of October 2008 was the third major reaction. Because the US Treasury was unable to price toxic mortgage derivatives, it invested TARP funds in banks and other financial and non-financial firms, gaining equity in those firms that would allow them to gradually write off those assets against profits earned from the Federal Reserve’s zero interest rate policy. The federal government aims to recoup its funds and possibly make a profit by selling its stock shares over time. The federal government had regained the majority of the TARP monies, as well as interest income, by late 2010.
23However, these policies failed to halt the flood of recession and anti-Bush sentiment, propelling Obama to the White House. Many Americans viewed TARP as a rescue for Wall Street oligarchs that left the average American still in financial distress.
How could the federal government utilise fiscal policy to help the economy recover faster?
The government can reduce fiscal stimulus by raising taxes, cutting spending, or doing both at the same time. Individuals have less disposable income when the government hikes individual income taxes, for example, and spend less on goods and services as a result.
During a recession, why does the government boost spending?
If the economy falls into a recession, taxes will decline in tandem with income and employment. At the same time, when people get unemployment benefits and other transfers such as welfare payments, government spending will rise. The deficit grows as a result of such automatic changes in revenue and spending.
What were the federal government’s and the Federal Reserve’s responses to the crisis?
How did the federal government and the Federal Reserve respond to the crisis? They lowered interest rates, which led to the emergence of subprime mortgages. They seized a few firms that controlled a large portion of the mortgage market. A $700 billion bailout plan was approved by Congress.
In reaction to the Great Recession, what did the Federal Reserve do?
What did the Fed do in the aftermath of the Great Recession? It bought bonds on the open market to lower interest rates.