Fiscal Policy in Rescue of Recession and Its Problems

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Table of Contents

Introduction
Main body
Conclusion
Bibliography

Introduction

The focal point of the paper is to analyze and examine the nature how the fiscal policy or expansionary fiscal policy could help a country in recession and the possible problems associated with it. To understand this paradox it would be relevant to use the current crisis bailout plan to confront recession as a model. The trend of the international investment position of the U.S. could be termed as a problematic situation because with the balance of payment being negative there lays a subtle chance of market crash and even probability of deflation. The example of East Asia could be enumerated in this situation where it was found that the credit volumes of the economy of those countries lead to the massive market crash. Since the crisis emerged last year, most of the banks have had losses related to the investments in the poor USA housing markets. This has happened mainly due to the sub-prime borrowers who have very poor credit history and the default records of the USA home loans have caused the worth of the assets to sink, making the banks hesitant in lending money to each other. (Grynbaum, 2008)

Main body

The US Federal Reserve has put in major efforts to resolve the present problems involving credit and liquidity in the financial world as a rescue policy to counter recession. They are helping the financial banks to revive from the rock bottom, which they have hit in recent times, by engaging $180 billion. (3news, 2008) Nevertheless, the recession crisis continues even after several months since it first began last year. The mortgage lenders have announced a reduction in the total number of home loans that they are approving, mainly due to the problems that the banks are facing in producing funds on marketable money markets. This huge crisis in the credit market has not only hampered the world’s economy and its growth, but people also expect USA, which is the world’s largest economy to enter into a depression (Grynbaum, 2008).

There is a fiscal policy plan that includes an additional input of US$800 billion by the Federal Reserve. The amount of US$800 billion would be instrumental in buying the debts related to mortgage and the credits of the consumers in order to instrument a lending free up. At this point of time, it appears that there are two major problems related to this fiscal policy plan. The first one is the fact that there is not enough retail economy spending in relation to consumers. Secondly, there is a lack of consumer credit and there is no presence of a sound economy to sustain this amount. It is reported, “the Federal Reserve and US Treasury are pumping a jaw-dropping $800 billion directly into the credit markets, buying up $600 billion worth of mortgage debts” (3news, 2008). The net probable result however, there is the danger of creating a credit gap and this could result in further recession.

Conclusion

Whether the fiscal policy or the expansionary fiscal policy will be able to reinstall the confidence of the uneasy credit market in the long run, is still an unanswered question. According to a BBC editor, the actions of these various banks may help to solve all the liquidity problems, like facing temporary shortage of funds, but it may not be able to ease their worries of resolving their long-term financial problems. There has also been a second phase in the crisis where most of the banks are uncertain when it comes to lending money to each other, either out of liquidity shortages or out of a general concern that the borrower bank will not be able to pay back the amount in time. This has created the well-known crisis of confidence (Grynbaum, 2008).

Bibliography

3news; US to try bailout ‘plan C’ to solve credit crisis; 3 News / CBS; Wed, 2008;
Grynbaum, Michael M. Persistent Anxiety Over Tight Credit Sends Stocks Plunging. NYTimes.com. 2008.

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Fiscal Policy in Rescue of Recession and Its Problems

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