By Daniel Griffith, Carnegie Mellon University
This is the final article of a 4 part series covering the recession, its causes, and potential future. This is the first in-depth description of the financial crisis Bulls & Bears has provided.
As direct monetary injection began to take effect during the early part of 2009, economic forecasters started to see that the current recession would be far from over by 2010. At year end 2008, the U-6 Unemployment rate (which takes into account workers who are no longer looking for work due to discouragement, or underemployment) was 13.5% (the last time it reached that number was 1931). As a response however, to the government stimulus the annual inflation rate for 2008 was 0.1%, the lowest it had been in 54 years. Energy prices plummeted and nationwide, the standard of living had decreased as more people cut back their every day spending.
The Wall Street collapses drew criticism across the board-as everyone not involved in the market maneuvers in major financial companies condemned the relentless pursuit of profits- claiming it results in misleading investors and eventually causes a collapse of the financial markets. Many currently claim that Alan Greenspan could have singlehandedly helped the U.S. avoid this recession, by opposing the creation of giant banks with expanded powers, curbing subprime lending, and letting interest rates rise naturally- as opposed to keeping them artificially low.
A major problem for the U.S. government during the next 10 years will be liquidity. The current U.S. GDP is estimated at around $14.5 Trillion, with the public debt at $12.7 T. By the end of 2011, forecasters expect the national debt to be roughly 97% of the U.S. federal debt, if nothing is done to change the current trend- this should be cause for concern, given that Greece is near default with a national debt of 12.7% of its GDP). Possible options are to curb government spending, raise individual’s taxes, or increase institutional taxes. There has been recent conflict over a proposed ‘Tobin tax’ on derivatives transactions (forcing day traders to pay a percentage of their exchanges to the U.S. government). While this is mainly fueled by resentment towards large financial institutions such as Goldman Sachs, people seem to forget that plenty of people outside these firms trade daily, and fit the IRS’s description of a “Day Trader” (making several trades a day, almost every day the market is open).
In addition to the proposed tax, on March 18, President Obama signed into effect the $17.5 Billion Hiring Incentives to Restore Employment Act (HIRE), in an effort to curb unemployment. However, one of the provisions in the act is aimed at dealing with a nagging problem the IRS has faced in the last year- capital control. The act requires that companies moving funds internationally must from now on send 30% of the initial investment directly to the U.S. Treasury, and that the firms disclose all information on non-exempt individuals. This legislation, if signed into practice by most notably the Swiss government, would effective end the feud between the U.S. and Swiss bank UBS, requiring the company to disclose of all the private individuals holding accounts overseas (to avoid domestic taxes). With this legislation, the U.S. government hopes to restore billions in previously lost tax revenue.
The government is creating as many safeguards as possible- with current debates about further regulating the financial sector. While efforts to lessen the effects of the recession have been fairly successful so far, some economists still fear we may see a double dip in the near future (as potential bubbles aiding the recovery may pop). Forecasters warn that unemployment may not rise for some time, as the general trend is a lag in employment growth following recessions. However, one primary method of measure is GDP, and with it currently rising, we are reminded that all recessions end, this one included.
