Question

Discuss the possible solutions to “heal” the economy once the great recession was in full force.

Answer 1

The financial crisis started in 2007 and developed into a full-blown recession by 2008, with the level of employment loss hitting a high point of over 700,000 jobs lost in the private sector through the spring of 2009 a month from November 2008. Payroll jobs in the private sector declined from its peak to its lowest by 8.8 million. The financial crisis and severe recession have been deeply damaging, and no leader has the ability to quickly turn the economy around. The U.S. economy bounced back from extreme recessions in 1975 and 1982, but they were very different. The job loss in this recession was much more serious, and the housing bubble burst left a legacy of trillions of dollars in lost capital, underwater loans, collapsed banks, sluggish wage income growth, and residential construction collapse.

Given the constraints they faced, the Obama Economic Team and the Federal Reserve deserve tremendous credit to stabilize the financial sector and drive through a major fiscal stimulus. All credit to the Paulson Treasury, which began the rescue plan for the bank. Neither the rescue of the bank nor the stimulus package were pretty; they were both very nasty. Yet they did what they had to do to stop the fall of the financial sector and lead to a dramatic economic turnaround, where GDP grew from a decline rate of nearly nine percent in the fourth quarter of 2008 to a growth rate well above three percent in the fourth quarter of 2009 and the first half of 2010.

Had there been no financial intervention, both the large economy and the condition of lower-income Americans would have been far worse. To save the banks and stimulate the economy, it took courage and judgement. Given the severity of the economic crisis, when Obama came to office, he should have warned Americans that it would take several years for a solid recovery to take hold; that the downturn and reactions to it would cause huge budget deficits, and that many of his signature programs would have to be delayed before recovery is certain.

The economy is caught in a vicious cycle in which the profits of businesses rise so slowly that hiring is minimal. The resulting lousy labor market means slow household income growth. With incomes gradually rising if at all, household debts still high and household price down, consumer spending is poor, perpetuating the cycle of weak demand. Two anchors that weigh down the recovery and make it harder to break the vicious cycle are the overhang of surplus housing and high consumer debt.