In the recent years, the US economy has gradually improved. However some areas such as the housing industry have still remained negatively affected. The following paper will discuss some of the causes that led to the crisis and what the Federal Reserve should do to address the affected areas. Introduction Despite the improvement in the US economy, there is still a decrease in interest rates, depreciation of currency and unstable markets due to fluctuations.
The current debt loan of the US is also big and may lead to depression of the economy resulting in minimized growth. This is mainly caused by low interest rates which encourage borrowing for the business sector and the consumers looking for homes. In order to service these loans, the government relies on foreign aid. Current Situation The current recession and economic crisis was however majorly caused by the increase of subprime adjustable rate mortgages issued, the decrease in prime mortgages issued and the made up collaterized debt obligations.
In addition, bank loans were offered to people who expected an increase in housing prices leading to their default. Moreover, supply and demand, inflation due to an increase of oil market prices which led to the increase in price of some basic commodities, money supply and GDP which influence the economy were significant causes (Tyler, 2010). Thus, the US economy is still undergoing financial crisis as a result of these decreasing interest rates hence the zero interest rate bound and the major increases in government spending.
This leads to the discussion of money printing against bond financing which arises since the latter creates fears of inflation. The current situation consists of a “money multiplier” which is influenced by the ratio currency/deposits and reserved/deposits. The public is practicing the C/D more by keeping money in the mattress while the banks exhibit the R/D through their preference to cash than loans and investments. US Congress and the Federal Reserve
The US congress and the federal government should improve the international market in order to improve the GDP and attract more investors. Additionally they should lower interest rates in borrowing to attract the public to buy housing units (Liu, 2010). Once, the interest rates hit zero the federal government should increase the monetary base by purchasing bonds unlimitedly since it cannot be negative. This is because highly positive interest rates rely on deflation (Lemgruber, 2008).
? List of References Lemgruber, A. C. , 2008. A Monetarist Analysis of the US Macroeconomic Situation. Emerging Markets Ecomonitor. December, 7. Liu, 2010. Feature: To End or not to End. August 15. Retrieved from Xinhuanet: <http://news. xinhuanet. com/english2010/indepth/2010-08/15/c_13445774. htm> on August 15, 2010. Tyler, 2010. The Current Macroeconomical Situation and the Global Recession: The Cause of The Current World Crisis. Armchair Economics. March, 24.