State of the U.S. Economy-2011

Right now, the U.S. economy is expanding but it is expanding at a very slow rate. The United States has historically been known as a powerhouse in the global economy but it seems to be changing. How did we get to where we are today? In order to understand this question, we need to understand where we were even a few years ago. The main goal of this paper will be to show you the current situation of the U.S. economy, what brought us to this point, and how we can make our economy stronger.

The years 2008 and 2009 brought the worst recession in the United States in recent history. It caused unemployment to skyrocket and banks to fail. How did this happen? One of the main causes of this was due to the collapse of the housing market. Prices for homes were on the rise in 2001 and peaked in 2006. (Bubula) After 2006, the prices of houses started dropping severely. At the same time, banks experienced a time of financial innovation, specifically in the way they handled mortgages. Financial institutions started to not hold these mortgages on their balance sheets. Instead they were originating and distributing them to other firms. (Bubula) This new type of mortgage style was notoriously called mortgage backed securities.

Before the financial crisis, the interest rates were at a really low level. This caused a lot of people to borrow from banks and purchase a large share of homes. The multiplier effect should have been great during this time. However, when the housing market began to crash, the actual value of these homes began to drop below the cost of the mortgage. When the public started to fall behind on their payments, they went into foreclosure. The financial sector at this time was fueled by the housing prices going up. When it began to crash, our economy took a huge hit and it led the United States into a financial crisis.

Direct results of the financial crisis lead the United States in a drop of consumption expenditure. The fact that there was less consumption and less credit also brought less investment. When there is less consumption and less investment the GDP suffers. Because the GDP contracted so much during this time we also saw a large spike in unemployment. (Bubula)

There were a few monetary and fiscal policy responses that were established because of the severe drop in GDP followed by a large spike in unemployment. Monetary policy was by far the most aggressive during this period. In three months, the Federal Reserve nearly tripled its balance sheet by purchasing assets like mortgages from banks. (Bubula) The goal of this was to put a large supply of cash into our economy and hopefully it would fix itself before we were driven into a recession. However, these methods were not too effective so the FED had to figure out a less conventional way of stimulating the economy.

When monetary policies didn’t prove to be affective, fiscal policies were used. The goals of the fiscal policies were to raise

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