The responsibilities of the Federal Government in the American economy go beyond the regulation of industries in the economy. The government is also responsible for managing the overall pace of the American economy, maintaining stable prices and high levels of employment. To achieve these objectives, the government uses two main tools: the fiscal policy which entails taxation and government expenditure and monetary policies that entails controlling money supply.
The history of United States economic policy dates back to the 1930s Great Depression. Since then the federal government has continually used a mix of the monetary and fiscal policies to promote sustained growth and promote stable prices. Implementation of these policies has not been easy; there have been numerous failures on the part of the government.
The case of American presents several lessons; the public finance policies that have been implemented in the American Economy between 1970s and 1990s performed poorly in the stabilization of the economy. In some of the episodes, fiscal policies amplified the economic fluctuations instead of producing the intended moderation effects. Fiscal expansions transpired during times of economic boom while fiscal contractions occurred during recessionary periods. Thus, the fiscal policies have proved to be counterproductive and pro-cyclical; overriding the stabilization intention and leading to economic instability (Woods, 2009). Thus, these policies are economic steers that may not always produce the intended effects on the economy.
In the awakening of the economic downturn and the depending of the global financial crisis, the federal government undertook an emergency government intervention to try and prevent possible bankruptcy for its major financial corporations. The measures were targeted at ensuring that these financial institutions resume their normal operations. The measures involved: the conventional reduction of the lending rates to commercial banks and providing stimulus packages to home buyers. Most significant were the steps by the federal government to salvage the various financial institutions and the main employers such as the country’s leading automobile manufacturers from insolvency (Woods, 2009). The measures included offering economic incentives that enabled the acquisition of weak companies like Merrill Lynch, by offering credit to the big companies like AIG and General Motors and the placing of Fannie Mae and Freddie Mac under receivership.
To expand money supply and reduce the possibility for a deflationary cycle, the federal government utilized both the fiscal and monetary policies. The fiscal stimulus package entailed the use of government borrowing and spending to compensate for the reduction in private sector demand that had resulted from the financial crisis. Additionally, as 2008 came to an end, the government undertook a major monetary policy action and undertook a significant monetary injection in the in the financial market (Woods, 2009). The moves included the acquisition of government debt and the purchase of troubled banks assets by the central bank.
Though the bailout program was pert of the monetary and physical policy, it was not without political interferences. It is evidence that some well politically placed companies were favored in the allocation of the bailout funds. The bailout was more of a political reward since banks that were managed by managers who had served in the Federal Reserve boards had higher chances of accessing the bailout funds. Additionally, banks whose headquarters were located in similar districts with the residence of a member of the United States House of Representatives were at a higher chance of being allocated the bailout funds. Thus, political connections served as the most important factor in accessing the funds as opposed to the financial viability of the bailed out institution.
Reference
Woods, T. (2009). Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse. Washington, DC: Regnery.