Business US Has Faced Acute Economic Crisis

Business

US has faced acute economic crisis since 2008. Present economic crisis started from the downfall of housing sector which lead to the financial crisis such as bankruptcy of Lehman Brothers (at that time fourth largest investment bank in the U.S.A.) and bankruptcy of largest insurance in world, the AIG (which were later saved by introducing bailout packages by U.S. government) which further collapsed production and unemployment plummeted. It is usually termed that it is the worst economic crisis since the Great Depression. (Moseley, 2009)

Even though Fed Reserve claims, the crisis has averted to some extent but the problems of unemployment, recession and inflation still prevails in U.S. economy.

According to U.S. Bureau of Labor Statistics, the unemployment rate staggers to an amount of 8.3% in February 2012. Similarly, U.S. Bureau of Labor Statistics also shows that consumer price index is on upward swing in 2012. Recent wave of agitation under the banner of "Occupy Wall Street" is also embodiment of high unemployment rate prevailing in U.S. economy.

Bernake (Chairman Federal Reserve) says, the U.S. job market remains weak despite recent three months strong hiring. Moreover, he says that further job gains require more policies that are robust. (Economic Crisis, 2012)

Marxist Theory can explain position of U.S. market; it says the significant decline in the rate of profit is the main cause of the twin evils of higher unemployment and higher inflation and hence, lower real wages experienced in recent decades. As in the past periods of depression, the decline in the rate of profit reduced business investment, which in turn resulted in slower growth and higher rates of unemployment.

Moreover, international rating agencies like Standard and Poor's have downgraded U.S. credit rating in 2011, which has sent shivers among the international investors, reduces investment from all across the world.

American government has responded to this economic crisis through bailout packages and through fiscal and monetary policy tools. However, so far it looks that bailout packages were only beneficial to prevent the economic crumble down but it has not been able to restore the growth rate. In 2009, President Obama told the Bankers, "I am the only one who is standing between you and the pitchforks, the bankers got the bailouts, they were supposed to extend credit, extend mortgages .They did pretty much nothing and they went back to same actions as before, making money through trading. At this point, I think people are fed up with it. Rightly or wrongly, there is huge amount of anger." (News Sources, 2011)

Fed's FOMC (Federal open market committee) has primary responsibility for conducting monetary policy in USA. Federal Reserve responded aggressively to the economic crisis. From September 2007 to 2008, the Federal Reserve lowered its short-term interest rate target, known as Federal Reserve funds from 5% to effectively zero. Later on to support economic activity, FOMC tries to longer-term interest rates by purchasing $1.7trillion worth of mortgages backed securities, government agency debts and treasury securities.

Fiscal deficit is another major concern for U.S. economy. The deficit for FY 2011 was $1.3 trillion (third largest in U.S. history).Similarly deficit for fiscal year 2012 is $1.327 trillion.

The IMF report states (on July 25) "Executive Directors observed that the economic recovery continues at modest pace through slowing down recently due partly to some transient factors. Directors noted that depressed real estate markets, persistent high unemployment and weak consumer confidence have held back growth prospects. While macroeconomic policies have remained supportive thus far, fiscal policy faces tight constraints going forward, given unsustainable public debt dynamics. With a still-wide output gap and downside risks to the outlook, especially potential spillovers from financial markets in Europe, Directors called for a cautious approach to unwinding macroeconomic support." (council on foreign relations, 2011)

It looks that fiscal and monetary policy tools are not working to great extent. A renowned economist Nouriel Roubini says that official unemployment is 9.1% but the one that includes discouraged workers who have left the labor force or partially unemployment has gone from 16.2% to 16.5%. In addition, if you add to it millions of people you have in jail in the U.S., then it will become the four times the amount of any civilized country as a share of population. He estimates the unemployment is probably closer to 20%, and that is just among the average population. For minorities, the youth, or unskilled people that do not have a high school degree, the number is closer to 30%. It is stressful situation.