Macroeconomic Theory, and Its Failings - Example

Name : xxxxxxxxxxx Institution : xxxxxxxxxxx Title : Economic Environment Tutor : xxxxxxxxxxx Course : xxxxxxxxxxx @2010 Introduction The great recession is said to have started in the United States of America during the year 2007. This was according to the National Bureau of Economic Research. This later on spread to most of the developed nations of the world resulting into a major slowdown in economic activities. The recession crisis has been going on within the economic environment distinguished by a number of inequalities which were ignited by the occurrence of the crisis since the year 2007-2010. In July 2009, it was proclaimed by a rising number of economists that the financial crisis might have come to an end. Nonetheless, in the United States, the requisite two successive quarters of growth in the Gross Development Product did not in fact take place until the end of 2009.This crisis that started in the US has proved to be one of the major economic downturn since the World War II (Drews, 2010). The UK economy has undergone a period of recession from the year 2007.The Gross Development Product has gone through two successive quarters of negative growth. In the year 2008, however, the economy grew by a reasonable 0.7% in the overall Gross Development Product, with the economy undergoing a period of recession within the next half of the year. The recession stayed on covering much of the year 2009, with current government figures representing a record of approximately 4.8% decline of the Gross Development profit over the year (Beenstock, 2009). The economy however moved out of recession, with the Growth Development Profit going up by 0.3%.This was after it had shrinked for the last six years in a row. Total output production went up by about 0.4% in the last quarter of the year 2009 as compared to the fall of 1% in the past quarter. Among most of the developed nations, year 2009 provided the hardest hit on the UK economy with the GDP going down by about 1.9% within the fourth quarter of the previous year. This is in comparison with the previous year and assumed as the worst ever performance since the year 1991.Consumer spending went down sharply with the manufacturing as well as the production output also demonstrating a decline of about 4.5%. The household spending had also experienced a decline of 0.7% within the fourth quarter due to the wage rate which had not shown any indications of getting better since 2008 (Beenstock, 2009). The manufacturing output later on went up by 0.2% during the month of January of the year 2010 in comparison with the same month of January of the previous year. This did not include the energy production. The output from the service sector however went down by 1.4% during the month of December 2009 as compared to the same month of the previous year. The present situation financial crisis facing the UK economy has been as a result of negligent as well as reckless lending of real estate mortgages In North America. The lending practices are conducted by the financial institutions as well as being encouraged by the UK government. These were being given to people who had small incomes as well as poor credit histories and whose probabilities of repaying the credits were uncertain. Some of these people would fail to pay their first payment forcing their assets to be taken over by the lenders. When capital sums were due to be paid, nobody had the money to pay back and therefore vigorous and profitable market came out. The distress to many banks came so abrupt that they resulted into putting much restrictions rather than increasing the availability of credit. The bank of England, which for example, issues a series of unused credit facilities on monthly basis, indicated that it had started falling in the mid 2007. The restrictions of bank credit facilities are believed to stop the growth of firms and households’ deposits and the lack of money within the economy hits spending, profits and assets prices. Asset prices in this case fall leading to a startling rising levels of losses on bank loan assets (Kates, 2010). People pay back their bank loans so that they are able to improve on their financial situations and in this case if everyone is doing it at the same time, the resulting downfall in the bank deposits in terms of the quantity of money leads to a drop in prices and perhaps a rise in the actual value of the outstanding debts. These resulting markets were complicated debt instruments selling in addition to buying debt. The coming out of the sub-prime loan losses led to the beginning of the financial crisis in 2007 and this uncovered other uncertain loans as well as overrated property or asset prices. With the loan losses getting bigger, a major fear broke out within the inter-bank loan market. Many huge investments as well as established commercial banks in UK went through huge losses in addition to even going bankrupt, leading to immense public assistance financially. The global recession resulted in a quick drop in international trade with rising rates of unemployment as well as falling commodity prices. A number of economists predicted that the resurgence may not get back to normal until 2011 and that the recession would be the worst since the Great Depression of the 1930s.Conditions resulting to the financial crisis, characterized by high asset prices and related bang in the economic demand, are assumed the major causes of the prolonged period of easily available credit, not enough regulation and rising inequality. The crisis has renewed curiosity in Keynesian economic thoughts on how to do away with this situation. Fiscal and monetary policies have been considerably eased to stem the recession in addition to any associated financial risks. Economists advise that the stimulus should be withdrawn as soon as the economies recover enough to plan a path towards sustainable growth. The monetary and fiscal policies are thus enormously vital part of the way in which any economic system of a nation works well and must therefore supposed to have appropriate properties. The framework to be made should therefore involve setting up a committee with the role of conducting its own assessment. Along with future expectations, it is the integrity of the policies as put in the response functions that alleviates out the prospects of inflation. There is however just more than that to this (G. B. P. & J. C.D. B. B, 2009). Coupled with a normal natural rate or ‘accelerationist’ outlook of inflationary pressure, an appropriate response function should lead to the expectation of long term economic growth. The UK economy being a market based ecomomy, calls for a quick recovery. And due to the economic situation as a result of the financial crisis, the government reacted quickly to this. The government reacted to the crisis through infusing some money to the banks. This was conducted through a policy referred to as ‘Quantitative Easing’. Rather than lowering down the bank rates to increase more money in the economy, the Bank provides extra money directly. This does not entail coming up with more banknotes. The Bank instead clears out for these assets by creating money electronically and crediting the accounts of the companies it bought the assets from. This extra money supports more spending in the economy to bring future inflation back to the target. Under the arrangements applying in the UK, the repayment will be through the sale of the equity or the ordinary share holding the UK government bought with the £200 billion which it loaned to the banks at some future point of time. The hope is that the money put into the bank's balance sheets will secure a solution and in so doing allow banks to get back to business faster than otherwise would be the expected. In turn, creating and providing credit to the borrowing public. This, in turn, will lift spending throughout the economy and a return to growth. The idea is that banks will get back to profitability levels, and with that, their respective equity share price should rise making their sale more attractive to the investing public. All of which makes it easier for the government to sell its bank shares and get its money back; possibly at a profit. The present framework involves the dedication that the GDP would be restricted to a sustainable as well as a sensible degree, which can be easily interpreted for the debt ratio of less than 40%. There is also a consensus that the fiscal policy will have a balancing role in the short time which more often than not involve the realistic compromise of enabling the usual stabilizers to go over the crisis cycle unrestricted fiscal action is looked down upon on the grounds that it has been in the past, regularly established to be destabilizing. There are also other aspects of fiscal policy that are vital, for example forecasts mostly represent the assumption that the public expenditure is cash-limited i.e. brought out in nominal terms, an institutional structure involving real expenditure reductions in cases of increasing price shocks. The fiscal policy reaction just like the interest rate functions mix longer term commitment with a role in short term macroeconomic stabilization. Conclusion It however remains in the policy discussions as a moderately underdeveloped conception. With the short term forecasting and assessment, however, the fiscal policy is not by surprise, often assumed as exogenous contribution. All this recommends a significant role for fiscal policy in ensuring the stabilization as well as inflation control. Both the monetary as well as the fiscal frameworks are therefore underpinned by flexibility. This gives them the independent flexibility to respond to events in the forward looking manner. Policy reforms that have increased the responsiveness of the economy contribute to flexibility as well. The flexibility that has been brought about by the microeconomic policy as well as the macroeconomic reforms has allowed the UK economy to hold up a lot of challenges (Great Britain H.M. Treasury, 2007). Bibliography Great Britain H.M. Treasury, 2007, Meeting the Aspirations of the British People, Prentice Hall, Sheffield. Great Britain Parliament House of Commons, Business, and Enterprise Committee, The Automotive Industry in the UK: Ninth Report of Session 2008-09. Beenstock, M. A., 2009, Neoclassical Analysis of Macroeconomic Policy, CUP Archive. Great Britain Parliament and Joint Committee on the Draft Bribery Bill (2009): Draft Bribery Bill: First Report of Session 2008-09, Volume 2.The Stationery Office, 2009, p.167). Kates, S., 2010, Macroeconomic Theory, and Its Failings: Alternative Perspectives on the Global Financial Crisis, Edward Elgar Publishing, Oxford. Drews, S., 2010, The Role of Strategy Directors in the Current Economic Environment Akademische Schriftenreihe, London, GRIN Verlag. Read More