Blog 3

What did the US government and the Federal Reserve decide to do?

Nowadays it is not anymore a question of will the USA get into a recession, the question is how long and deep it will damage the US economy. The employment is decreasing 76.000 jobs in February 2008 and 80.000 in March. Due to a higher unemployment, encumbered citizen and flagging banks the economic growth will be weaker than in the years before. To stop or to diminish the coming recession the Federal Reserve and the US government tried to recover the markets by entrancing money and regulations.

In order to recuperate and to liquid the banks the Fed pumped 41 billion dollars into the market first November 2007 and than January, 2008 constantly 30 billion dollars monthly till 11 March, 2008, where they again decided to increase the amount to 100 billion dollars. Most economists assume that the reason is not only to keep circulating money it also should staved off the collapse of the Bank Stearns, the first bank that run into trouble in the sub-prime crisis. The Federal Bank will push more money into the global market if necessary.

At the end of October the Fed lowered for the first time the interest rates from 5.25% to 4.5 %. Now the interest rates reached 2.25% in March 2008. Cutting the rates give hope that the lenders will loose their anxiety to get some money back in the banks.

Furthermore the government decided to raise the taxes to get 150 billion dollars more for the market in 2008.

Another move to reduce the cost of high-end mortgages and to fill the financing gap is increasing the size of the loans FHA can insure, till now it is only a proposal of the government.

Other programs that the government started are called FHASecure and Paulson Plan. The FHASecure is designed to refinance borrowers with ARMs that are converting them into government insured FHA mortgages. The Paulson Plan is designed to streamline loan modifications that mean the borrowers with sub-prime ARMs can apply to get frozen interest rates at the loan start rate for 5 years.

With all these movements the USA try to calm down the credit crisis and to avoid a really bad recession, because economists claim this recession could be the worst after the World War II and maybe it is not causeless because there is already an estimated damage due to the credit crunch of 1.5 trillion dollar only in the USA and the credit market still not reached the safety zone, so unemployment and inflation is still rising what is the worst for an economy as we learned in class.