EC103-Topic#3: Fiscal Stimulus Redux

This blog refers back to one I asked of my students last Spring when the first stimulus package was passed by the Congress, and monetary policy from the Fall of 2007. As part of this assignment, I would like you to look over how the class thought about the economy and the fiscal stimulus then, and how you feel about the most recent fiscal stimulus. Also, taking a look back at the reasons for the Federal Reserve actions in December 2007. More recently, Harvard economist Marty Feldstein made these comments about the Fed and ECB (European Central Bank) with regard to monetary policy and other comments regarding fiscal policy. Ben Bernanke, who heads up the monetary policy of the FOMC, commented on another fiscal stimulus package this January which is summarized by US News. You might compare his recent comments with the ones he made about a year ago.

Text of the old blog, and a link to it.

Recently, much has been said of an impending recession and what the government or monetary authorities should do to combat a prolonged recession. Ben Bernanke, chairman of the Federal Open Market Committee, recently endorsed a fiscal stimulus package in addition to aggressive monetary actions to fight off a possible recession. However, Dr. Bernanke only advocated certain types of fiscal stimulus in order to improve the timing of the action. Many are concerned that further cuts in overnight lending rates might worsen the economic outlook rather than improve it. However, uncertainty about the usefulness of fiscal policy has also existed since it has been used to stabilize the economy. Fiscal authorities are under pressure from voters to keep the economy from fluctuating, but have had limited success, especially when battling short-run fluctuations. However, many economists still advocate using fiscal policy when facing a long-run shortfall in output.

Questions you might try to answer:

  • Given all that has been discussed in class, do you agree with or disagree with the steps taken by the monetary and fiscal authorities since the beginning of 2008? What about the steps taken since the beginning of 2009?
  • Knowing that the current economic downturn/slowdown is related to credit markets, what other tools has the Fed used to try and create more liquidity in the economy? Will using these tools have an impact on output in the short-run? long-run?
  • Updated version of the old question… If it turns out that the economy has a recovery in the near term, and shows signs of growth by the end of the year, what should a ‘responsible’ monetary authority do in order to counteract the moves made during the first half of 2009? Do you think this is going to be possible?

I would like your statements to be as subjective as possible, or in jargon terms, positive and not normative in nature. Also, remember, I want you to keep your descriptions short, basic, and related to classroom content. Read other students comments before posting, and please leave your name with your posting.

26 thoughts on “EC103-Topic#3: Fiscal Stimulus Redux”

  1. I agree with the steps taken by the monetary and fiscal authorities in 2008 because these steps seemed to have helped increase consumer spending in the United States. I think that the stimulus package of 2008 was necessary because the economy was in trouble and in need of a bailout from the government. Without the stimulus package the economy might have not survived; it was in desperate need of capital which the government provided. I also agree with the steps toward economic recovery taken in 2009. Ben Bernanke stated in his speech at the London School of Economics on January 13, 2009 that souring assets need to be bought from banks in addition to the injection of more capital into the system (“Ben Bernanke: Fiscal Stimulus Alone Won’t Be Enough”). This step is particularly important because it will help relieve the economic problems from their roots. Recovering from an economic crisis like the one the United States has suffered from is a long process that cannot be completely cured by one act or a small amount of time. I think that the monetary and fiscal authorities are taking the necessary steps to lead the country to recovery despite the fact that the economic situation is still dire.The Fed has power to raise or lower the federal funds rate, or interest rates, to help the economy. Currently, the Fed is cutting rates, and they have been reduced to a rate is very near zero. The actions of the Fed concerning interest rates are contrary to the actions of the European Central Bank, which is raising interest rates (Feldstein). Lowered interest rates will promote spending and investing because it is cheaper to borrow money. However, this method of increasing spending in economy is hindered by the fact that banks are very hesitant to lend because they are fearful.If the economy recovers in the near term, monetary authorities should take cautious steps to ensure that the recovery continues. I think that they should regulate the lending activities of banks more closely to avoid a situation like the sub-prime mortgage crisis which greatly contributed to the economic crisis that the country suffers from today.BibliographyMartin Feldstein “The Crisis: a tale of two monetary policies”,Authorised=false.html? “Ben Bernanke: Fiscal Stimulus Alone Won’t Be Enough” -James Yick

  2. As suggested by students last spring, I believe that Ben Bernanke, the Federal Reserve Chairman, must continue to act quickly in response to the economic slowdown. Our economy has no time or patience for “political hold ups and ramifications when something positive can be done.” The goal of fiscal stimulus is to boost economic activity during periods of recession. In order to achieve this goal, money must be made available and consumer demand must increase. Although consumer spending did increase slightly in 2008, the economy must continue to grow and change. I believe that the Fed’s decision to slash rates was on target with their goal of re-stimulating the economy. 

However, as noted by a student last semester, there is also a downside to taking quick action. If Bernanke acts on a fiscal stimulus package before the most effective ways of spending the money is decided and fully comprehended, more money will be wasted and people will continue to be angry with policy makers. We cannot allow people to lose all faith in our economic experts! -Sophie CohenReferences: The New York Times, “Fed Chief Backs Quick Action to Aid Economy”

  3. I agree with many of the steps that the monetary and fiscal authorities have been taking. However, I do believe they made a very grave mistake. In 2008, authorities tried to downplay the crisis and avoid the word “recession” in hopes of keeping the American people in good spirits. In January 2008, for example, Ben Bernanke said that he was sure that our economy was “extraordinarily resilient” and that any stimulus package spending would be “explicitly temporary.” If Bernanke and other authorities had not been decidedly optimistic and had, instead, started dealing with the crisis in a more complete manner, our current economic condition would most likely be less sever than it is. Lowering interest rates is a sound way to increase borrowing and hopefully spending, however, now that interest rates are practically zero, the Fed has exhausted this resource. Furthermore, even if interest rates are low, people still need to be confident in banks in order to invest in them. In the U.S. News article “Ben Bernanke: Fiscal Stimulus Alone Won’t Be Enough,” Bernanke offers solutions to the stimulus package that may also increase confidence. He suggested that the government absorb bad assets from failing banks in exchange for compensation. Not only would this help the banks, it would also help investors to feel more confident because they would know that the banks had few, if any, bad assets. He also suggested implementing programs to reduce the number of home foreclosures, which would help to stabilize the housing market, as well as increase homeowners’ confidence in the market. It is important that we do not forget the events of the economic crisis if we quickly recover. There were fundamental flaws in the banking system that contributed to the crisis and I think it is essential that we attempt to fix them. Furthermore, I, like the first blogger, think that closer bank regulation is going to be a necessary change if we hope to avoid economic disaster in the near future.

  4. Just in time to end the 2007 economic boom, in 2008 the US economy experienced a continuing downward spiral that, until recently, no one would admit was a full-blown recession. Both Bernanke and White House officials confidently assured the public that the use of the term recession was extreme and unnecessary. In 2008 Bernanke rejected fiscal stimulus as a viable option for restarting the economy, saying that our economic troubles would be short-term, rendering fiscal policies ineffective (because of the lengthy process and long-term principles). But even if Bernanke had recognized earlier on that a recession was looming in the future we still might be in exactly the same situation financially (but hopefully with a little more direction). Although Bernanke’s opinions regarding fiscal policy in 2008 did not benefit American households, he has done everything in his power to ease the financial crisis. As chairman of the Federal Reserve, Bernanke’s decisions effect monetary policy, not fiscal policy. Usually when the business cycle is in a contraction phase the Fed effects consumers by buying bonds and lowering the Fed Funds Rate, which sets rates for interbank lending. In 2008 Bernanke began to lower the Fed Funds Rate, which he saw as a solution to our contracting economy. However, because of the recent credit crisis banks have lost a lot of capital due to the inflated value of risky assets. The banks’ inability to collect on mortgages and securities has left them with less capital than expected. Therefore the decrease in the Fed Funds Rate was basically ineffective because banks do not want to lend when they have a shortage of capital. The change in monetary policy was not totally ineffective but it did not stimulate consumption adequately. Policy failures can largely be attributed to the government’s fiscal policy, especially Bush’s denial of a recession in 2008 that has led us deeper in debt. Although Obama’s fiscal policy finally offers us a new proactive approach (less about tax cuts and more about spending) he continues to push around bad assets to create more liquidity (asking private investors to buy assets). There is obviously no easy solution to the current recession but it is clear there we are in desperate need of a long-term solution that utilizes both monetary and fiscal policies to affect the principles of our financial system. -Claire Suna“The Case for Fiscal Stimulus” by Martin Feldstein “The Crisis and the Policy Response” by Ben Bernanke“Fed Chief Backs Quick Action to Aid Economy” by David Stout

  5. I believe at this point, we are forced to deal with a fiscal stimulus plan. However, I do not feel as if using TARP and the updated stimulus package is the smartest idea for the government. Yes, the Fed took an aggressive stance when the crisis became apparent, but I believe the bailout of the responsible CEOs and large corporations was wrong. As Feldstein notes in his article, with higher tax rates, one can distort economic incentives and weaken the economy in the future. What we are seeing now with the plan to give tax cuts to companies is causing innocent taxpayers fear and disdain. Our tax cuts are no more than helping in the short run, for as we can tell the recession is deepening and the future seems meek, unless some reform occurs. Where are the real tax breaks and packages for the people without homes, living in tents in California? Similar to Mr. Kohn, I believe that when the “decisions do go poorly, innocent bystanders should not have to bear the cost.” Yes, many should work together to fix the problem of our economic crisis, but all the people who have lost their jobs do not deserve to go homeless. In a comment previously stated, the Fed was confident in 2007 to not use the word “recession.” I do believe there is an effect on consumers to easily believe in the government’s words when all else fails, but obviously no one can longer solely look to the government for the answers. Normally, the Fed is supposed to show transparency and help in a time of crisis. But Ben Bernanke’s belief in policy communication will no longer be helpful. He believes that the Committee should be able to influence longer-term interest rates by informing the public’s expectations about the future course of monetary policy. Yet, a simple statement will not solve any problems. Most importantly, psychologists from an article in The Economist have noted the level of influence stress can have on decision-making. How are we to know what decisions are best and what decisions are clearly thought up or just thrown together in the storm that is our economy. Psychologists found that exposure to stress led participants to choose riskier decisions when trying to decide between take a minor loss or a major one (The Economist). It is true that professional traders are used to stress, yet when the circumstances are so unusual, errors can be made. Many economists and government officials are lost on what to do next, but in an article stated by a professor named Raghuram Rajan, a set of reforms could help stay immune to booms and busts. For example, regulations aimed at the large institutions could involve limits on size and activities when the company is growing fast. “What if firms big enough to pose a threat to the stability of the financial system were required to develop a plan that would enable them to be resolved over a weekend?” We are still unsure of the right moves to ensure long-term economic stability, however the economy is in need of a reform that may just have to defy the economic system we have come to live by. Eloise Nicoll

  6. Ever since the economic crisis began in 2007, the Fed has taken an aggressive role in mandating the recovery of the economy. I believe that the Fed’s response to the crisis has been necessary but may have extended too much control over the economy. One of the tools that the Fed has used repeatedly during the crisis is the pumping of money into major industries. Specifically, the pumping of money has been in terms of bailout money to major failing industries such as car manufactures, banks and insurance companies. The bailout money given to these industries have allowed them to avoid bankruptcy. Yet, although the industries are avoiding bankruptcy they are not improving their financial standings. The fact remains that, nearly a year later, the Fed still has to take taxpayers’ money and pump the money into the same failing companies. For example, the car manufactures, such as GM, have still not been able to recover from the crisis even after billions of dollars have been pumped into them. The government has given GM a reported 13.4 billion dollars in bailout money to prevent the company from failing. Nevertheless, a week ago the government has stated that they want GM and Chrysler to start bankruptcy proceedings (BBC News, 2009). The government should have forced the car manufactures to start bankruptcy proceedings a year ago instead of continuing to pump money into the failing industry. Therefore, I believe the Fed should continue to bailout the industries such as AIG, who are interconnected with other big industries in the economy to avoid the economy completely collapsing, but also should start allocating money towards the smaller businesses that have had to face the crisis without support from the government. By allocating the money to smaller businesses, the money will be pumped to the consumers instead of big industries where it is being given out as bonuses to CEOs and other high position workers. Another major tool that the Fed has been utilizing since 2007 is lowering the Fed rate and the interest rate. Through lowering the rates, the Fed has been able to stimulate society to spend more and to borrow from the banks. However, on the other hand, lenders are reluctant to lend money out due to the low interest rates and other concerns. Also, in 2008, the low interest rates caused inflation to rise mainly in oil and food. In April of 2008, the CPI had rose 4 present in the past 12 months (Feldstein, 2008). A year later, the prices of food and oil have decreased as the interest rate continues to steadily approach 0; thus illustrating that the Fed’s action in lowering the interest rate will cause fluctuations with inflation but will not hinder the economy in the long run. However, recently the issue that has come into focus is that although the interest rate has been lowered, it has only been aiding the banks to stimulate them to borrow, and not the American people. Recently Bank of America and other banks are increasing the interest rates on nearly “4 million U.S. credit-card customers who carry a balance” (Kim, 2009). By issuing higher interest rates, the banks are now not only receiving aid from the government, but are demanding more money from the American people. Overall, I believe that the Fed is taking the right steps to alleviate the economic crisis but I believe that the Fed’s aide is too favorable to the big industries at the expense of the smaller businesses and to the American citizens. If the economy begins to miraculously recover in the short-term, the Fed’s initial steps should be collecting the loans they have given out to industries and start reducing the federal deficit. They could also slowly start increasing the rates again until they are back to where they were before the economic crisis. However, I believe that the recovery stage of the economic crisis will not happen quickly but it will take awhile for our economy to be fully functioning and growing again. -Caroline ShermanBBC News, (2009) “GM Stock Hit by Bankruptcy Report”, M. (2008) “No more Rate Cuts”, J (2009). “BofA to Boost Rates on Cards With Balances”

  7. What can be seen from Ben Bernanke's statement is that the government needs to start buying more bonds as to add more money to the economy to stimulate growth. From what we have studied, this step that Ben Bernanke seems to find necessary should help stimulate the economy and cause it to grow out of the recession that many fear we are facing today, besides Bernanke. Bernanke sees that the economy is growing, but "at a slow pace, particularly in the first half of the year." However, he does recognize that the economy needs help. To do this, he came up with a stimulus package, which I find was necessary. Without something to help our economy, not only would our growth slow down, it may start falling due to lack of trust in the government and economy which is why they are trying to make "a 'liquid financial market'". However, the fact that the government has recognized that the economy needs help is great. This means that they should try new economic policies if old ones do not work, as Feldstein implied. He believes that lowering interest rates will not improve the economy. I am not sure if I necessarily agree with this statement, but I do know that if it does not work, the economy will need new and creative ideas to help stimulate it. Because of this idea, I agree with the steps being taken thus far because they try to address the aspects of the economy that need help. I am not sure if I agree with their plans explicitly, but addressing it is all they really can do now. Since the state that our economy is in now is very new and has not happened before, taking any form of action would be an experiment and will hopefully work. I hope that the policies work the first time, but right now it is a trial and error run, which hopefully won't last very long. As long as the government keeps telling the public what is happening I believe that there should be more positive actions across the nation. It seems that the people respond to positive reinforcement rather than negative, which makes sense, and the liquidity of the stimulus package helps a great deal with that. All in all, I believe that the economy is in dire need of help, and the government is doing all it can to do so, it is only a matter of waiting it out to see the outcome.Annie Roos“Ben Bernanke: Fiscal Stimulus Alone Won’t Be Enough” "Fed Chief Backs Quick Action to Aid Economy "“The Case for Fiscal Stimulus” by Martin Feldstein

  8. While I disagree with some of the recent actions taken to stimulate the economy, I believe that most of these actions are necessary, as our economic system is crumbling. The stimulus package and bailouts potentially could’ve saved the economy from crashing completely. I believe that Ben Bernanke must continue to act quickly and decisively, as he has done in the past, however; he must do so carefully, as any incorrect decision could result in economic disaster and a loss of faith in policy makers among the people.It is very upsetting that we, the taxpayers gave billions in bailout money to the car companies. I completely disagree with this. The American car companies were doomed already and we just wasted billions on them. The government now wants GM and Chrysler to declare bankruptcy, something they should’ve done long ago. We simply cannot continue to bail out every company that fails in large part due to the idea of moral hazard.Policymakers need to be aggressive in their stimulus activities, but sound judgment must be used in deciding which companies are capable of being saved, and which companies are most necessary to the foundations of our financial system.Source: BBC News, (2009) “GM Stock Hit by Bankruptcy Report”“Ben Bernanke: Fiscal Stimulus Alone Won’t Be Enough” 
-Chris Barach

  9. Because the government does not have the power to motivate people to consume, they must use incentives. Based upon data collected, it has been determined that GDP rises with purchases when the government increases purchases output. Obama’s Romer-Bernstein study of fiscal stimulus determines how much real GDP responds to tax cuts, government purchases, and the two forms of fiscal stimulus. According to the article, the Kotlikoff-Leamer proposal, which runs through state sales taxes, needs to be executed immediately once it has been announced.This information was found at the following site:

  10. Caleb Mayerson,When this economic crisis does turn around the banking sector should go back to normal, right? NO, there is nothing in place to say none of this interconnectedness between banks will not continue. This is not to say banks should not trade between each other but that risky loans and rates should stay within the bank issuing them so they can assume all of the responsibility. When the fed was deciding whether or not to let Bear Stearns fail, they went in a checked their books. This should be a regular occurrence by the fed. There should be a penalty to the banks if there books are incorrectly marked to high. Also, banks should communicate much more publicly to assure the people there is nothing to worry about. The 1930 recession and the most recent one both starting with speculation. If there were more communication between the banks and their customers, speculation would not occur. Whether it is one of these ideas or another I have no touched on, the banking sector must make changes. This may mean less profits for the banks, but it will mean a more stable economy. Blackstone, Brian. “Bernanke Is ‘Fundamentally Optimistic’ About Economy.” The Wall Street Journal.

  11. I agree with some of the steps taken by the monetary and fiscal authorities since the beginning of 2008. The US announced a rescue package in 2008. Without the stimulus package, the economy might not have survived, and the rescue package did lead to some stabilization of the financial system. However, it did not sufficiently restore consumer spending and banks were still wary to lend. The US government continued to further easing of monetary policy via interest rate cuts until early 2009. Interest rates were cut to enhance liquidity in the system. Because the government took partial ownership in banks via its rescue package, it could start putting pressure on banks to lend. The government did this with the expectation that consumption would increase, however many consumers hoarded their money. So the stimulus package has not led to as much consumer spending as expected. The interest rate was so low that no further cuts could be made. It could only conduct monetary policy by printing and spending money. When overnight rates were still noticeably positive, in January 09, it seemed quite clear that Hank Paulson had the upper hand over Ben Bernanke, and that he was calling the shots. When Paulson’s tenure as Treasury secretary came to an end, and the Fed funds rate targeted to between 0 and 0.25%, Bernanke seemed to have more clout. Amol Agrawal claims that, “All the paper says [sic] monetary stimulus alone is enough to get economies out of recession. Moreover, automatic fiscal policy works better than discretionary fiscal policy.” However, I think the government should implement both monetary and fiscal policy measures as soon as possible. The monetary policy will lose its effectiveness as recessions deepen, and if we wait to see if monetary policy will work or not, it will be too late to use fiscal policy as a backup. Should monetary policy fail, it will be too late for fiscal policy to do much good. There’s no guarantee either will do enough to matter. If the economy recovers and begins to overheat due to the dual stimulus, monetary policy can be used to cool things down. Using monetary policy to temper an overheated economy seems to be the one place we are pretty sure policy can be effective, and monetary policy can be reversed fairly quickly. The government should take fiscal policy needs into account when creating a policy package that is implemented in order to try to avoid a recession and prevent future inflation after having provided too much stimulus within a short period.Bibliography:“More Monetary and fiscal Policy measures in the offing” by Forex Gump“Monetary versus fiscal policy” Haoran Ma

  12. Given all that has been discussed in class, I agree with the steps taken by the monetary authorities, such as the Federal Open Market Committee (FOMC), and the fiscal authorities since the beginning of 2008. I also agree with the steps taken since the beginning of 2009 by the FOMC and the fiscal authorities. Knowing that the current economic downturn is related to credit markets, a tool the Fed has used to try and create more liquidity in the economy is lowering the target federal funds rate to a range of 0 to -0.25. This action was intended to promote economic growth that might have otherwise caused disruptions in the financial markets. The Fed pursues this looser monetary policy when actual output is below potential output and causing slow growth or recession. Using this tool will hopefully increase output in the short-run, however many banks initially refused to lend because there was a shortage of capital. If it turns out that the economy has a recovery in the near term, and shows signs of growth by the end of the year, the FOMC should raise the target federal funds rate because this will tighten monetary policy, thereby preventing actual output from exceeding potential output in the absence of higher interest rates, therefore reducing the risk of inflation. I think this is going to be possible because the American economy is very cyclical, so it should recover in the long-run from this recession. -Zach BrownSources: -“In Fed Rate Cut, Fears of Long Recession” The New York Times-Federal Reserve website press release (from Sept. 18th meeting)

  13. Due to the extreme circumstances of our current economy, I feel that the fiscal stimulus plan is both necessary and beneficial. The recession that the United States currently faces in the worst economic downturn since the depression of the 1930’s. Because of this, actions must be taken that typically would not be considered wise decisions by the government. The recent increase in government spending and in fiscal deficit are very different from past actions which relied more heavily on monetary policy. The typical response to a decline in the economy is to lower interest rates through monetary policy. But the government feels that the shift must be made in order to deal with the economy today. Feldstein comments, “Even with successful countercyclical policy, this recession is likely to last longer and be more damaging than any since the depression of the 1930’s.” The action the Fed is currently taking may not even be enough to pull the economy out of our current situation. Bernake feels that in addition to the actions already underway the Fed needs to plug more money into banks in order to stabilize the disrupted credit markets, buy “souring assets” (Bernake) from banks, and reduce any preventable foreclosures in order to help recoup the housing market. I agree with Bernake that additional steps need to be taken in this situation in order to prevent the United States from spiraling further into depression. As James Yick commented in his blog, Bernake’s ideas have the potential to really work because they attempt to solve the problem from the root rather then provide a quick fix that may not be long lasting. Bibliography:“Ben Bernanke: Fiscal Stimulus Alone Won’t Be Enough” “The Case for Fiscal Stimulus” by Martin Feldstein

  14. I think that the steps taken by the monetary and fiscal authorities have been good, considering this difficult time. Usually the first action taken, to stabilize the economy, is to utilize monetary policy, which is what the Fed did. The Fed can cut interest rates as a quick way to stimulate the economy. Right now though, this tool is not working, because even though people can borrow at low rates, people are unwilling to spend their money. The Fed cannot cut interest rates any more, since they are almost at zero, so there has to be an alternative plan to deal with the recession. I think now the only thing to do is shift to fiscal policy. Fiscal policy is not used as much as monetary because it is a longer process and needs legislation, but even so, I think that fiscal policy is the best way to stimulate the economy. Tax cuts will give people more money and make their incomes larger, creating incentives to work and spend more. I think that government spending would also help a lot by creating jobs for people and might even work better than tax cuts. Tax cuts might only promote people to save their extra money, whereas government spending will more likely raise GDP. Unfortunately, compared to monetary policy, fiscal policy is more effective in the long term and people are looking for quick ways out of the recession. Another problem with fiscal policy, as Bernanke pointed out, is that it might not be enough. Even with more money and more employment, people may still be fearful to spend and invest their money when the banking system is so unstable. It is difficult to know if fiscal policy is a good idea but I think that even with these problems, using these tools is better than doing nothing. -Alexandra FresneUCHITELLE, Louis. "Economists Warm to Government Spending but Debate Its Form." The New York Times 6 Jan. 2009. 15 Apr. 2009 WERDIGIER, Julia. "Stimulus Alone Won’t End Crisis, Bernanke Says." The New York Times 13 Jan. 2009. 15 Apr. 2009, Alan. "What Should We Expect from Fiscal Stimulus?" The American. 10 Feb. 2009. The Journal of American Enterprise Institute. 15 Apr. 2009

  15. I believe that fiscal and monetary policy taken by the Government and the Fed were completely necessary. The last fiscal stimulus in 2008 relied on the consumers to stimulate the economy due to the Tax Rebates they received based on income and other factors. At the time, this was an effective stimulus package and many of the people who received the stimulus check used them to stimulate the economy. Most people spent the extra money they were given. Temporarily, this worked great. However, there was a bigger issue at hand that a consumer driven stimulus could not fix; a housing crisis. The old stimulus approach would not be enough in this case to help stimulate the economy. Consumers could spend another rebate check but that wouldn’t help unfreeze the credit market. The stimulus in place needed to be very different this time around.The only way to unfreeze the credit markets was to inject capital into these banks by buying up the bad assets that they own. In this case, the Fed had lowered the interest rate as low as they could, and it still didn’t help unfreeze the credit markets. The Fed was able to create a new tool called quantitative easing that allowed them to give banks cash in return for their bad assets so that the banks would have money to lend. Without a credit market, there is no chance of getting out of the recession. I agree with the steps taken by the Fed and by the government that are giving the economy a chance to recover.The big question remains: what will the Fed do with all these bad assets after the recession is over? They have injected billions of dollars in capital into banks and taken these bad assets. No one really knows what these assets are worth, so the Fed is most likely taking a huge loss on buying these assets. In any case, someone is going to have to take a loss, and in this case, it looks like it is going to be the Fed. No matter what happens, the government must regulate the financial markets much better in the future in order to prevent another crisis. Allowing banks to make the same mistake again knowing the government will solve the problem would be catastrophic. ~ Nick Dupuis

  16. It is obvious that Ben Bernake has changed his views on the stability of our economy when he said that fiscal stimulus wasn’t a viable option. We have all come to see in our economy today that this stimulus package may be what our economy needs to be turned around. Our actions that are being put forth now with today’s stimulus plan put us in a position that ultimately pumps more liquidity back into our economy, much like we did during the great depression. Without some sort of action by Congress we would be in a far worse situation. As far as the first stimulus package, politically Congress was not comfortable with placing financial burdens and responsibility on tax payers for bailing out these financial institutions. I also agree that lowering the interest rate is the right thing for the Fed to being doing right, by decreasing interest rates, we are increasing spending, as a Keynes says, we must spend in times of recession. Ultimately this is not a process that is going to cure the economy overnight, but we are headed in the right direction with the stimulus package.

  17. The majority of the students from last year voiced their opinions in agreeing with Ben Bernanke decision to take charge in turning around our economy. For starters, the stimulus package is absolutely necessary. It is designed to bring more money into the economy and try to “stimulate” the market so that it begins to turn around. However, for this to occur, people need to gain their faith back into the market place. If the market continued to decline at that rapid pace, the market, along with many companies would of collapsed, therefore leading to a higher unemployment percentage than the country is experiencing already.However with all this being said, Bernanke still has doubts about the long-term impact this will have on the American economy. With tax cuts or spending increasing, Bernanke “implicitly acknowledges that such measures may be ineffective, or even harmful, in practice.” This could mean that the best possible solution for the United States as of right now would be to imply the Fed’s monetary policy, where their would be changes in the money supply and interest rates).“The Case for Fiscal Stimulus” by Martin Feldstein Essaris

  18. After the Fed exhausted all monetary tools to revive the economy, “it is essential that [they] continue to complement fiscal stimulus with strong government action to stabilize financial institutions and markets” (APA). The Fed has already exhausted their tools of monetary control by lowering interest rates and buying up bad assets in hopes of pumping more money into the system, so now must try and integrate more fiscal policy to try and dig our economy out of the recession. The government did what they had to do at the time to produce stimulus packages and lower interest rates in order to help banks that were thought to be incapable of failing. Because desperate times call for desperate measures, the government is going to have to implement more government control over the situation so that banks can get back on their feet. The housing market sparked this recession and we must find a way to get out of it. Bernanke mentioned that there have been “recent upticks in home sales and new home construction” (Rooney, CNN). Although the housing market is still very much depressed, this “uptick” will raise confidence and hopefully will be the beginning for a long-term recovery. The Fed tried to focus on short term, low interest recovery in 2007 up until now, it is important that the fed continue to assist banks fiscally and monetarily so that the economy can see a strong recovery in the coming years. The government recently ran a series of bank stress tests that hopefully will raise confidence and create a positive affect on the public morale. Bernanke acknowledges that timing is a key component when it comes to lowering and raising rates, he announced yesterday that “"[they] have a number of effective tools that will allow us to drain excess liquidity and begin to raise rates at the appropriate time.” (Rooney, CNN). Sources:

  19. I agree with the monetary and fiscal steps that the Fed and Government have taken over the last couple years. According to the ideas of Keynes of “spending against the wind”, it is best to increase consumption and spend more during bad economical times, and save more during good times. Increasing in consumption stimulates the economy and helps it grow and get back out of bad times. The easiest way the Fed can stimulate the economy and get people to consume more is through monetary policy, like lowering interest rates (the Fed Funds Rate) and doing open market purchases. This is what the Fed did at first. This is a quick fix and usually works. However, monetary policy is not working right now. So the Fed and the Government must look to fiscal policy to help, which they are doing. The first step is to fix the banking system by getting rid of bad assets. Right now, people are not spending because of their distrust in the unstable banking system and its bad assets, and also because of the idea that we are in a recession, which makes people think to save more. Tax cuts are necessary to make people feel like they have more money so that they will consume more. Also, increasing government spending creates more jobs that will give people more money allowing them to consume more. However public saving is defined as net taxes minus government spending. By decreasing the first, and increasing the second, that creates a huge deficit.-Jack McDermott“Monetary versus fiscal policy”“Fed Chief Backs Quick Action to Aid Economy” by David Stout

  20. Through tax cuts, tax rebates, and extension of unemployment compensation, monetary fiscal authorities have implemented a stimulus package for the early bird. In order for the package to be successful, it should be enacted sooner rather than later. As Dr. Bernake stated, the stimulus should be “explicitly temporary” and should altogether avoid anger that would effect the economy in the long term. As the economy still waits for the full effects of the suffering housing market alongside the mortgage slump, it would be smarted for the Fed to enact change in the short-term so as to fix the problem at hand rather than deal with the unpredictability of future markets. The question is, is all this politically possible? Will politician react fast enough to pass laws that will enact such a stimulus package so as to effect the economy now? Through debating politicians will prevent from any economic growth. Lawmakers’ attempts to aid the economy, however, has become a double edged sword. If laws that create new jobs for financially struggling families try to cut taxes, how will families in the future be able to afford the rising taxes used to help the National Debt? If lawmakers can only pass the appropriate supportive bills in the coming year will the economy be able to weather the oncoming storm that many economists predict. The housing market crash and the problem with mortgage rates loom over the horizon. The only way to keep our feet on the ground is to act now and not wait for when the real economic ruin comes.

  21. The FOMC should normally stick to the monetary policy of buying and selling bonds to regulate and stabilize the market. There will always be slight fluctuations that we cannot control, but these are natural and shouldn’t change the function of the FOMC. What we are experiencing today is more than a normal dip, this is a dive. The FOMC has exhausted all monetary policies, and is left without any of their conventional tools. With the interest rates on the floor, fiscal policy is the only direction they can turn. Many question whether the government should dabble in these new methods. If the government starts to buy bad assets and shares in public companies, then it is becoming entangled in the corporate and capitalistic realm in a way that most people feel is uncomfortably close to socialism. I feel that while there is danger in involving the government in the market and a profit motivated system, the government has the resources and power necessary to reverse the downturn. Even though the government is stepping in and trying to fix the infrastructure, the economy will not heal in the short term, because much of the strength of the economy relies on the public confidence in the system. Public confidence will not return until after the government has stepped back and the banking system is proven to be reliable again. This can take years. For now, keeping banks afloat and companies hiring will lead to people keeping their homes and jobs as much as possible. This is worth the complications that will arise when the economy gets back on its own feet and the government needs to pull out of the public sector. The government would restore the public sector by selling back the assets they bought and then strictly regulating the industry so that the same mistakes that put us in this position are not made again.Outside Citation:Dada, G. “The Implications of a Textbook Analysis of Macro Stabilization via Discretionary Fiscal Policy.” Econbrowser. January 14, 2008. 15 Apr 2009

  22. Fiscul Stimulus Redux 2009I agree with the actions that the monetary and fiscal policy authorities have been taking, but I believe they are treading dangerous ground. At the end of the 2007 boom the econonomy started to crash and burn, yet no one took the threat serious enough to admit it to the public. If this isn't handled more carefully instead having the optimism that this stimulus will be “explicitly temporary,” by Ben Bernanke and the Fed, then I fear for the future. If a longer term plan had been implemented then it may have at least softened the blow of the recession we are in now and if we look at the future with a plan for the worst then it will help the country if things do continue to get worse. I believe that the bailout is necessary and that this this new redux is needed to put the trust of the people back into the banks and the FED. This opinion is much like Randall S. Kroszner (a Fed Governor) who states that “the current stance of monetary policy should help the economy get through the rough patch during the next year.” So far the economy is getting noticeably better, even if it is quite slowly. The stimulus and steps like injecting more capitol in the system and taking away bad assets from banks will help the economy. Also by cutting Federal fund rates and lowering interest rates it will promote lending and spending.Sadly these steps may not be enough to truly fix things. The Fed is buying the banks bad assets but the banks are still not loaning out of fear that the will be no return profit, and the peoples trust in the bank is still not high enough. I have to agree that the Fed is doing the right thing I'm still just not sure how well it will turn out in the end or how fast their plans will work (if they work at all). In the short term I'm sure that these actions will boost the economy slightly, but as I have said in the long run the Fed can no longer cut interest rates and the lending and spending need to increase. Hopefully these actions will lead to that and the economy will recover with the recovery of trust from the people. If it turns out that the economy has a recovery in the near term (not likely), and shows signs of growth by the end of the year then the Fed should monitor the banks heavily, but the Fed should give control back to the banks. This way the banks will be monitored and guided toward better decisions and the Government will show that its not trying to control everything.-Xavier Richards

  23. For the most part I would agree with the steps taken in monetary and fiscal policy during 2008. The Fed took traditional action to correct the problem first started by subprime mortgages and the credit crisis, acting by lowering interest rates, offering tax rebates and increasing government spending to give people jobs and to stimulate the economy, something Keynesians would support. What was wrong with this was that it was slow to recognize the gravity of the problem that the economy was up against and simply wasn’t enough money to fix the problem. By giving people a bit of money back with a tax rebate wasn’t going to encourage them to spend. Furthermore, the lowering of interest rates and shear government spending wasn’t enough to prop up the financial system to help the banks liquidity. When the banks can’t lend the economy is put on hold. So, at the time these old economic solutions seemed like a good idea and thus were discussed as positive measures in the previous blogs last spring, and though they were not wrong to see these measures as a good idea, they weren’t going to be enough of a solution. What the economy really needed was a new way of thinking and a new stimulus. This solution came in the form of two programs, TARP and TALF. The Fed put these programs into effect to be a new source of capital through purchasing equity (much like the English had already done) and through removing bad assets by giving banks different/new balance sheets so that they could do business and the economy could move forward. These programs in conjunction with fiscal stimulus and the capitalizing of the financial system are becoming a new way of thinking about solutions for the economy and hopefully it will be enough of a stimulus and enough support to put our economy back on track.Eve LewisWork Cited: “Fed’s Official Remarks Send Stocks Soaring”“The Case for Fiscal Stimulus”“The Crisis: a Tale of Two Monetary policies”,Authorised=false.html?“The Crisis and Policy Response” Bernanke: Fiscal Stimulus Alone Won’t be Enough”

  24. ince the economic downturn has been in full display to the American public the Fed has had to act decisively to restore consumer confidence and to get banks lending again. To restore the flow of credit, there has been a controversial, large injection of credit into the financial system to immediately right the short term losses. Was that injection necessary? Absolutely. But what about the other steps that have been employed, such as the lowering of the Fed Funds Rate to somewhere around a quarter percent? Feldstein argues that cutting interest rates too much will hinder the economy more than it will help it in the long term. He claims that “Lower interest rates could raise the already high prices of energy and food”. Cutting the Funds Rate may be an immediate source of aid in unfreezing credit and getting banks lending and borrowing. But it may not be in the country’s long term interest. So what is the Fed to do? Output can be stabilized by monetary policy and fiscal policy. Economists across the board have come to conclude that the proper mix of public spending and tax cuts is crucial towards restoring public faith in the economy and rebooting the financial system–even coming to the turnaround in ideology that public spending and fiscal policy have become more vital than ever before. However, I strongly agree with Mark Thoma’s thoughts in his “Do Fiscal Policymakers Know What They are Doing?” blog; namely, that before any fiscal policy is lauded as the savior to the vices of the system, it must first be examined in light of the fact that “fiscal policies are deployed to achieve political and electoral goals, particularly in the larger countries and where monetary discipline has increased or where the central bank has become independent of the political process”. A politician’s fiscal objective is not always aligned with long run targets such as sustainability and low debt. Most importantly, it must be examined whether or not the fiscal policy makers know what they are doing in terms of balancing the immediate stabilization with the long term effects of intervening on natural economic cycles. -Alex Kraft

  25. It appears that while many of the students were in agreement of the fiscal stimulus package that Ben Bernanke was going to instill in the economy, they did not believe it would be beneficial since it would only be a short-term fix. As our economy has been rapidly falling with the rise of unemployment, increased oil prices and the stock market prices falling, our economy is in great need of a solution that will help to stabilize the economy in the long run, in order to bring it out of the current recession. On the other hand, any type of drastic change could potentially harm the economy as well. With the short term fix, being the fiscal stimulus, we can see monitor and see how well it is working before jumping into something else that we have no idea how it will affect the economy. In terms of the 2008 Fiscal Stimulus package, Democratic Senator Charles Schumer of New York believed that, “Direct injections of cash into the economy, through both immediate consumer and government spending, are the shots in the arm needed to ward off a recession” ( He believes that in many ways increasing spending will have a greater short term effect on the economy than tax cuts. Democrats believe that consumers play a very important role in the economy so by giving them stimuli to spend, it would help out to increase our money supply and cash flow. Bernanke recognizes that the fiscal stimulus alone will not help to improve the economy; the government needs to instill monetary policy in the government at the same time as the fiscal policy. Bernanke mentions “efforts to reduce preventable foreclosures…could strengthen the housing market and reduce mortgage losses, thereby increasing financial stability” as one of the possible steps to help work alongside with the fiscal policy (Mullins). People would not have to foreclose on their homes if they are able to afford their loans. Lowering the interest rate would allow people to borrow money at lower prices. This would also allow for them to be able to save more, so they can still be active consumers in the economy and keep the money supply flowing.

  26. I do agree with the steps made in the beginning of 2008 with monetary and fiscal policy, along with the additional stimulus plan enacted in 2009, however it does show flaws within the American financial system with regard to the freedom of the banks and insurance firms. If it does turn out that the country proves to make a recovery by showing positive signs of growth, the banks will still be heavily controlled by the fed, as it already owns most of them. This may be a positive influence on regulating lending activities of banks and monitoring situations that occur over long periods of time such as the housing bubble. In addition, the “responsible” monetary policy should be to keep prices and inflation low. The CPI has increased 4% in the past 12 months, showing that that the lowering of interest rates have added to upward pressure on commodity prices. (Feldstein, Martin) These prices will have to be monitored closely, or else they will constrict consumer spending instead of increasing it. As the US is recovering from the financial crisis, the rebuilding will be a long process that will not be settled in a single fiscal stimulus bill. In the article questioning the economic policy maker’s competence and how strong the automatic stabilizing effects of the economy should be, it asks whether the effects could have impacts later than intended. This could lead to further problems in the economic cycle or over the longer term. Even with this in mind, we must still depend on our economic policy makers to make the best decisions for the country as a whole in the short, and long term. -Derek SellhausenDo Fiscal Policymakers Know What They are Doing?April 15, 2008 Feldstein: No More Rate CutsApril 15, 2008 StoutJanuary 17, 2008

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