In trying to rescue the United States economic financial system there is a possibility of the economy to be affect by massive hangovers from the effort of the government to prevent the accumulation of debt. The government instead has found a swift way of stimulating the economy through the financial bailout. The government wishes to take a mountain of accumulated debts due to bad loans caused by financial institution as a result of subprime mortgage lending. The debt is worth $700 billion of money.
To have this debt clear under the bailout bill so that the economy can be stimulated to grow, the united government had no other option other than borrowing. For the borrowing to be successful, it had be done when the there is soaring of the federal budget deficit. The deficit for the year 2008 was expected to increase by $407 billion which was double the imbalance for year 2007 worth $161. 5 which indicated a slowdown in the economy. However, as from 2008 up to now, $168 billion programs of economic stimulus are already doing in the books of government.
The passed congress legislation gave authority to have the Fannie and Freddie be rescued which resulted into the boosting of national debt. The legislation the administration late authorized the bailout financial system (Bernanke, 2008, 1).
The implementation of the financial bailout as an economic stimulus has caused a lot of concern on what long term affects it poses to the United States economy. The issue here is, as the government is borrowing to offset the already existing debt, the debt instead is expanding from time to time.
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To pay the national debt interest the government is spending not less that $400 billion each year. As the debt increases, the cost of government borrowing also goes up and therefore leading to some of the indented programs in settling that existing debt to be awarded less money. Due to financial crises of the year 2008 the Federal Open Market Committee (FOMC) has eased the stance of the monetary policy. The FOMC has consistently relaxed the monetary policy which has stabilized the prices giving hopes to increase of economic slack and flattering-out of the energy prices.
FOMC after the implementation of the monetary policy anticipates the economic strengthening over this quarter as the previous lagged monetary policy action effects, amid improvement of the conditions of financial market has starts to provide extra spending and stabilization of the housing activities. Despite the implementation of the monetary policy in the year 2007 and up to the early 2008 the economic growth slowed sharply. In 2007 the restrain on activities concentrated on the housing sector, where as in year 2008 the other sectors of economy began to experience this.
The prices of commodities have remained high for the whole year causing consumer price inflation (Bernanke, 2008, 23).
The demand on houses, construction of residential home and prices of homes have fallen sharply in the year 2008. In the first few months of 2008 the delinquency rate continued to go down across all mortgage loans. New subprime mortgage loans has been highly unavailable for that year making the borrowers to experience high risk of credit which had to go for the guarantee programs offered by the government.
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Due to this, the Federal Reserve with the other stakeholders is now committed to come up with a solution that will prevent the foreclosure of the houses. The Federal Reserve is committed to offer an environment that gives support to goals of the homeownership of giving loans to borrowers who are creditworthy with ideal protection of the consumer and responsible practices of lending. On the issue of consumer spending has been going down for the whole of 2008 which is an indication of restrained influence.
The real labor income growth rate has gone down ass the prices of energy and food, and conditions of labor market continue to weaken. This has affected the consumer purchasing power. In addition to this, it has been difficult for consumers to borrow as the standards and the terms have been tightened. This has led to deterioration of the quality of the overall credit of consumer loans (Bernanke, 2008, 30).
On the side of business sector, the financial and economic conditions that influence spending of capital have appreciably deteriorated.
During the months of 2008 the real outlay for business software and equipments were flat. The inventories have decreases irrespective of sluggish final sales making the firms to act promptly to prevent the imbalances of inventory from arising. The United States corporate profit during the same time was very low. The weakening of corporate profit and tight conditions of credit has resulted to slow down of business investment. Loans of Commercial and Industrial at banks in the firs months of 2008 briskly expanded.
In the same period the quality of credit in nonfinancial corporations remained solid. As a result of this banks tightened the standards of credit on commercial loans of real estates. To conclude, the economic stimulus act is approximated to result to rebates worth $115 billion which will be sent to the households by the end of 2009 (Bernanke, 2008, 35).
Work cited Bernanke Ben. Monetary Policy Report to the Congress. Washington, D. C. , July 15, 2008, pp. 1-42