Monetary Policy
Failed Reactionary Monetary Policy
During the campaign to the 2000 presidential election, the incumbent party had a list of economic achievements under its belt which included a record low of unemployment rates, a balanced budget — even a surplus — and a broad trend of rapid economic growth. The opposition, represented by our current outgoing president, George W. Bush, came to office under the promise of repaying the American public its investment in the economy. As it took office, the economy plunged into recession, with the market correcting itself of the unprecedented expansion of the previous decade. With events like the Enron scandal revelation, the continually detrimental culture of corporate malfeasance and the costly attacks of September 11, 2001, the economy’s correction transformed into a stagnant economy which has since descended into a serious recession. The Bush Administration responded to its appointment to office by fulfilling its promise, passing an ‘Economic Recovery Act’ designed to stimulate a return to growth. Its primary avenue to accomplishing this would be the essentially faulty fiscal policy of pairing marginal income tax cuts with an uncontrolled and misappropriated discretionary spending approach. The monetary policy which would be twinned with this would be one of reactionary interest rate manipulation, demonstrating the Federal Reserve’s willingness to allow an irresponsible fiscal policy to take the lead in shaping the economy.
During the preceding administration of President Clinton, the economy relied on a strategy of national savings and investment in technological and social progress. This was informed by the premise that “higher national saving leads to higher investment, which means that future workers have more capital with which to work and are more productive as a result. The increased productivity generates a larger economy and higher national income.” (Orszag, 1)
That is contrasted by a total reversal of such measures in the current administration’s ‘recovery’ legislation. From a fiscal standpoint, the Bush income tax cuts would have only a modest impact on the immediate goal of continued economic expansion. While consumer spending increased slightly, personal savings were not likely reflected in the marginal incarnation which characterizes still current tax policies. The advantages therein afforded to the lower and middle class tax brackets would not be substantial enough to effect personal savings trends. As the Center on Budget and Policy Priorities report indicates, “if you save to achieve a fixed goal for retirement or education, for example, a reduction in tax rates could encourage you to save less, since the rate of return you earn would be higher and thus you could accomplish your goal with a lower saving rate” (Oszag, 4) Moreover, even in the short-term, consumer spending increases could likely be countered by the lingering effects of a recession, which has stimulated or been buffeted by a general increase in costs of living such as energy expenses and product inflation.
This can be considered an indication that fiscal policies which had appeared to have an immediately beneficial impact — if only in the neutralization of negative economic indicators — upon receding economies, would quickly be revealed as merely cosmetic. Evidence in reflection suggests that the Federal Reserve conspired to the allowance of the economy to proceed at this pace, misinterpreting the misappropriation and deregulation of federal policy as temporary and cyclical economic reality. This is more than evident in a statement offered by the Federal Reserve on its mildly responsive approach to what would eventually reveal itself as the formative stage of today’s recession. A statement from December of 2002 denotes a recommendation “for the federal funds rate to be unchanged at 1 1/4%. The committee continues to believe that this accommodative stance of monetary policy, coupled with still robust underlying growth in productivity, is providing important ongoing support to economic activity. The limited number of incoming economic indicators since the November meeting, taken together, are not inconsistent with the economy working its way through its current soft spot.” (AP, 1)
Of course, considered across a longer-termed timeline, such policy effects take on revealing proportion. Income tax cuts must traditionally be paired with a decrease in budgetary savings. Such is certainly evident in the Bush policy approach, which has reversed the record budgetary surpluses established during the wildly expansionary Clinton era in order to sustain an excess of two-trillion dollars in federal income tax cuts while spending liberally on military defense contracts and overseas reconstruction efforts. The record spending deficits which now dominate the investment outlook for the federal budget suggest that the U.S. may be unlikely to soon enjoy another era of proliferated expansion. Indeed, the deflation of our national budget through tax cuts has caused a rather frugal, and some might even argue negligent, approach to stimulated job recovery, improving resource distribution and easing consumer burdens through better corporate regulatory oversight. The principle that an approach with such consequences can be employed to stimulate expansion is fiscally unsound, contrasting the foundational resolution that “economic growth reflects increases in the capacity to generate income through technological change” and other indicators of future economic vitality. (Gale et al., 1) the Bush administration’s marginal tax cut was heavily reliant upon the notion that consumer spending could be expected to stimulate economic growth.
By reducing the national income, especially as would be the case with ratification of its proposition to make its tax cuts permanent, the Bush administration stifled growth and growth potential. Such is to say that “in the face of enormous increased public needs, the U.S. government will be borrowing money in order to pay for a tax cut that went overwhelmingly to upper-income Americans.” (Faux, 1) This defies fiscal logic especially in its imbalance, which makes it less likely to place money in the hands of those that truly need it. The wealthiest, and therefore the most lavishly benefited parties of the fiscal policy, were those who were least likely to require a larger income in order to participate in the consumer economy.
In addition to its problematic fiscal policies, which would include aggressive military spending and dramatic income tax cuts for the wealthy, the current presidential administration has sought to combat the recession and subsequently sluggish recovery by appealing to a singularly directed monetary policy. Focused on cutting interest rates in order to obstruct economic decline and to prevent the destructive incursion of inflation, the Federal Reserve has acted independently (though with the administration’s endorsement) to counteract mild or regressive growth patterns. “Since January 2001, the Federal Reserve [had] reduced its benchmark policy interest rate, the federal funds rate, from 6.52% in September 2000 to a [2002] level of 1.75%.” (Walsh, 1) This appeal to monetary policy however, has been a largely reactionary economic device, ill-equipped to provide opportunities for growth. Instead, it has served as a preventative measure to further decline and the downward spiral of diminished dollar value.
Even in this capacity though, it has been considerably nullified in its protection of the economy by the significance of the Bush Administration’s faulty fiscal policies. While monetary policy can be utilized as an immediate stabilizer in times of recession or contraction, it is nonetheless dependent upon the sound propriety of tax policy and discretionary spending in order to functionally serve a market economy. The dependence of both interest rate levels and expansion rates upon a collective of investment means that any policy which is detrimental to that end may likely have a composite effect of contracting the economy.
The subprime mortgage crisis is perfectly indicative of the danger with which the administration has flirted throughout its reckless tenure. The continued lowering of interest rates has stimulated a deluge of credit-based investment by average Americans who sought opportunities for home ownership in a favorably saturated real estate market. Under the thumb of inflation, dramatic rises in gas prices and associated commodities and the continued decline of the dollar’s value relative to foreign currencies, these average borrowers cannot afford to repay their ownership loans. The outcome is today’s recession, which if continued unchecked by poor presidential policy will spill over into outright depression.
Indeed, as fiscal trends correlate to the gaining momentum of living costs, and with our policies becoming more apparently unequipped to create jobs, our long recovery from recession continues to stagnate. The explosion of costs for oil, the as yet undetermined cost of war in Iraq, the overall trend of living necessity price growth and the heated competition for jobs opening up overseas through globalization have caused an intertwining cycle of misguided fiscal policy and consequently impotent monetary policy.
The Bush Administration continues to press for a permanency of its tax cuts, despite the collective of expert evaluations and the already appearing evidence of their present destruction. Such is a threat to the future economic posterity of the United States, given the inevitability that such fiscal policies will inhibit rather than stimulate spending, long-term consumer confidence and sustainable growth.
The current Federal Reserve administration has sought to combat the sluggish economy and the persistence of recession by appealing to a singularly directed monetary policy. Focused on cutting interest rates in order to obstruct economic decline and to prevent the destructive incursion of inflation, the Federal Reserve has acted independently (though with the administration’s endorsement) to counteract mild or regressive growth patterns. After several years of sluggish economic performance and a response on the part of the Federal Reserve by way of a consistent reduction in interest rates, a number of factors have conspired to produce market bust. Precipitated at its base by an irresponsible level of homeowner loaning at a subprime rate, the market’s current condition is one of marked pressure upon banks to collect on debts which a great many owners cannot afford to resolve.
As a result, the last six months have seen a tumultuous unfolding of market events, with the housing economy taking the biggest hit. With few buyers in the possession of real assets and banks now wary to lend to all but the most resource-wealthy of borrowers, the Federal Reserve has intervened once again. Consistent with its response to flagging market conditions throughout the Bush tenure, “the Fed has also lowered its benchmark rate six times since September to 2.25% from 5.25%, and traders anticipate it will cut by at least another quarter point this month to cushion the economy’s downturn.” (Brinsley, 1) in the midst of this, a major U.S. bank, Bear Stearns declared insolvency this past month, requiring the Fed to step in an intervene with a multi-million dollar bailout. To this end, “Fed Chairman Ben S. Bernanke last month agreed to lend against Bear Stearns securities, paving the way for JPMorgan Chase & Co. To buy its Wall Street rival.” (Brinsley, 1)
In the face of the current and overwhelming market condition challenges such as the collapse and merger of major banks, this appeal to monetary policy has been a largely reactionary economic device, ill-equipped to provide opportunities for growth. Instead, it has served as a preventative measure to further decline and the downward spiral of diminished dollar value.
Even in this capacity though, it has been considerably nullified in its protection of the economy by the significance of the impact which inflation is now having on the ability of borrowers to attend to their loans.. While monetary policy can be utilized as an immediate stabilizer in times of recession or contraction, it is nonetheless dependent upon the sound propriety of tax policy and discretionary spending in order to functionally serve a market economy. The dependence of both interest rate levels and expansion rates upon a collective of investment means that any policy which is detrimental to that end may likely have a composite effect of contracting the economy.
The subprime mortgage crisis is perfectly indicative of the danger with which the Reserve has flirted throughout the reckless tenure of the current presidential administration. Under the thumb of inflation, dramatic rises in gas prices and associated commodities and the continued decline of the dollar’s value relative to foreign currencies, average borrowers cannot afford to repay their home ownership loans. The outcome is today’s recession, which if continued unchecked by poor presidential policy will spill over into outright depression. The Federal Reserve has spent the past six months intensifying a strategy which had only narrowly averted economic disaster across seven years. By this year, that aversion had defaulted officially, bringing about an end to obscuring our true economic state.
Just this week, it was reported that “the unemployment rate rose to 6.7%, a total of 10.3 million, which is 2.7 million more than the start of the recession in December 2007. Unemployment has steadily worsened since its low point of 4.4% in October 2006. (Source: BLS, Employment Situation Summary)” (Amadeo, 1) Now it has become clear that we are experiencing a real and undeniable recession.
And we can see through the consideration of the monetary policy, that idea of a culture of ownership has been crushed under its own weight, with no real prosperity to give it girding. Certainly, middle class Americans have historically taken the perspective that while opportunity and wealth are theirs to gain, the burden of risk which gives foundation to this system is to be taken on by those wealthy enough to invest in the development of a small business, stakeholding in a large organization or presiding ownership over varying stocks and properties of fluid value. The ownership and investment which are the lifeblood of the American economy have been seen to offer simultaneously the greatest opportunity and the most significant load to bear in the event of unforeseen recession or personal misfortune. Today, however, due to an increasingly unstable economy and a degree of exploitation which appears to pit the rich against the already dramatically disadvantaged poor, the risks once reserved for those with the means to go out and seek them are now becoming a common experience for those who have simply sought to live their lives according to America’s prosperous standards. According to the text by Hacker (2006), there is an ever-diminishing concreteness and stability underlying the American economy with the outcome being a context of sheer risk for those without the means or intent to undertake such.
Indeed, as the Hacker text shows, such matters as the housing crisis, the drastic deficit budgeting and the current misappropriation of our monetary policy have collectively shaken a system that had prior encouraged the entrance of so many players unfit for its rigors. It is the argument of the Hacker text that the United States has been oriented toward the endorsement of the types of economic behaviors that stimulate personal ownership and a stake in a competitive economy. However, in its current incarnation, this system is proving internally flawed. As the author argues, “an insurance and opportunity society is based on a simple but powerful notion: We are most capable of fully participating in our economy and our society, most capable of taking risks and looking toward our future, when we have a basic foundation of financial security.” (xi)
This is to argue that there is a fundamental disadvantage to those middle and lower-middle class Americans who have worked and risked limited financial means to, for instance, become home owners in the midst of what is now being called a credit crunch. The extreme largeness of quantity of residential and property foreclosures just in the last year is indicative exactly of Hacker’s point, demonstrating that something as fundamental as the ownership of one’s own property has become a point of instability and even peril to the point of economic ruin. Here, there is a clear indication that while tens of thousands of Americans are being blamed and are losing property for defaulting on high-interest, sub-prime mortgage loan repayments, they are nonetheless suffering the consequences of poor policy orientation and the willful shifting of the economic burden from rich to middle class and poor.
This discussion touches upon a number of factors which have contributed to that shift, identifying such issues as free trade as being clearly culpable for some degree of this change. With so many manufacturing and service jobs leaving the American economy for more cost-effective contexts in the developing world, the insecurity of the American job market has been compounded by such damning factors as the inflationary climb in the price of fuel commodities. These two inverse trends are significantly reducing the buying power of the average American, with the value of the dollar diminishing considerably in the face of rising foreign ownership within American borders.
Ultimately, this highlights an issue which is fundamental and devastating to all middle class Americans. With the mismanagement of our economy deconstructing a once sturdy free-market economy, the wealthy have wrangled through policy change and corporate corruption to shift the burden of risk to the middle class while retaining all the positive opportunities there available.
The monetary policy has essentially served as a swinging door to federal policies which were inherently designed to perpetrate a wealth transfer from poor to rich. The fiscal irresponsibility and corporate deregulation of the Bush Administration helped to dismantle a prosperous America in a relatively brief space of time. The Federal Reserve, for its part, simply cut interest rates at a staggered rate and with the ultimate effect of gradually obscuring the true declination of our economic fortunes. Today, with bailouts being pitched in Congress to the rescue of corporate criminals and American homeowners falling into misfortune, it is clear that America must take the Federal Reserve out of private hands and restore it to the public interest.
Works Cited
Amadeo, K. (2008). Economy Lost 1.9 Million Jobs Since Recession Began. About the U.S. Economy. Online at http://useconomy.about.com/b/2008/12/08/economy-lost-19-million-jobs-since-recession-began.htm
Associated Press (AP). (2002). Text of Statement on Interest Rate Policy. The New York Times. Online at http://query.nytimes.com/gst/fullpage.html?res=9C06E3DA143AF932A25751C1A9649C8B63
Brinsley, John. (2008). Volcker says Fed’s Be ar loan stretches legal power. Bloomberg. Online at http://www.bloomberg.com/apps/news?pid=20601087&sid=aPDZWKWhz21c&refer=home
Faux, Jeff. (2002). Take Back the Tax Cut. Economic Policy Institute Journal, Winter, 2002. Online at http://www.epinet.org/printer.cfm?id=980&content_type=2
Gale, William G. & Orszag, Peter R. (2004). Bush Administration Tax Cuts: Effects on Long-Term Growth. The Brookings Institute. Online at http://www.brookings.edu/views/articles/20041018orszaggale.htm.
Hacker, J. (2006). The Great Risk Shift. Oxford University Press.
Orszag, Peter R. (2001).
Marginal Tax Rate Reductions and the Economy: What Would Be the Long-Term Effects of the Bush Tax Cut? Center on Budget and Policy Priorities. Online at http://www.cbpp.org/3-15-01tax.htm.
Walsh, Carl E. (2002). The Role of Fiscal Policy. Economic Research and Data. Online at http://www.frbsf.org/publications/economics/letter/2002/el200226.html
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