The Fiscal Deficit Crisis in the United States

Understanding the National Deficit The amount of money that the United States government owes as of October 17, 2004 at 03:48:52 pm GMT was $7,435,016,998.21. The debt has increased by an average of $1.7 billion per day since September 30, 2003! From a more individual perspective, currently the United States population is roughly around 294,555,320. With this number of people, each U.S. citizen would have to pay $25,241.50, just to break even. How did the U.S. arrive in such a state where the country owes so much money?

Even today, strong debates continue over major issues caused by the Great Recession in part over the accommodative federal monetary and fiscal policy (Economic Policy Institute, 2013). The Great Recession of 2007 – 2009 enlarges the longest financial crisis since the Great Depression of 1929 – 1932 that damaged the economy. The causes of the Great Recession all started as hundreds of billions of dollars was given to the United States abroad and financiers conceiving were to make a profit and what better way but the real estate market. Since the Community Reinvestment Act of 1977 and an expansion made in 1995 the than President Bush endorsed the program that created Option adjustable rate mortgages (nick-named “Pick-A-Pay”) to allow for bank to sell these options even though they were high risk (Conservapedia, 2013). The Community Reinvestment Act of 1977/95 is defined as to framework financial institutions, state and local governments, and community organizations to jointly promote banking services in the community” (Office of the Comptroller of the Currency, n.d.).

The US government had a surplus in the year 2000, but implemented tax cuts and later had to pay for two wars, both aided in adding to the debt. By 2008, the US government had accumulated approximately $11 trillion in national debt, with close to a yearly deficit of $1 trillion ("2011 This Is…" 302-304). This was the year the began the era now known by many as “The Great Recession”, when the stock market plunged and the economy was thr... ... middle of paper ... ...Vital Speeches Of The Day 77.9 (2011): 304-305. History Reference Center. Web.

Just after ten years of Asian financial crisis, another major financial crisis now concern for all developed and some developing countries is “Global Financial Crisis 2008.” It is beginning with the bankruptcy of Lehman Brothers on Sunday, September 14, 2008 and spread like a flood. At first U.S banking sector fall in a great liquidity crisis and simultaneously around the world stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems. (Global issue) According to the specialists, there are many reasons for this global financial crisis. We try to focus some prime reasons behind this crisis, which are as follows- Subprime mortgage crisis- The Subprime mortgage crisis is an ongoing financial crisis characterized by contracted liquidity in global credit markets and banking systems. A downturn in the housing market of the United States, risky practices in lending and borrowing, and excessive individual and corporate debt levels have caused multiple adverse effects on the world economy.

Beginning with September 11th attacks, to the housing bubble bursting, to the recession hit in 2007. The combination of all these major financial breakdowns, along with the hundreds of other fiscal responsibilities that the government holds has lead America into a very big budget deficit. Although the United States needs a big monetary supply to fuel it’s government, the United States budget is in big trouble because of the huge amount of debt accumulated over the years and not enough money is being received. There are several government agencies that provide us with data on the United States budget. The main agency is the GPO, the Government Accountability Office, followed by the Congressional Budget Office, the Office of Management and Budget and the U.S. Treasury department (whitehouse.gov).

The Impact of a threat of a credit default. The financial crisis 0f 2007-2008 is widely considered to be the worst financial crisis since the great depression. The effects of the financial crisis were cataclysmic it resulted in companies going under, others getting bailed out by the government and the stock market taking a nose-dive which led to a domino effect of recessions and bail outs around the world. The warrant for the financial crisis of 2007 was motivated by the subprime mortgage crisis. There was an increase in subprime lending which started in the early 1990’s and by 2007 all these loans totaled 1.3 trillion dollars which accounted for 20 to 25 percent of the u.s. .Housing market.

A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough.” (NBER) Not only did the United States experience a recession, but it was also the year our country went under an attack brought onto the World Trade Center, and this shook our nation up even more than an average event might. March 2001 ended a ten year expansion, and led to an eight month downfall of our economy, also known as the 2001 recession. II. Causes of Recession Many economists believe that the money put into computers in the late 1990s’ and early 2000s’ may have impacted the beginning of the 2001 recession, because of the Y2K scare. The aggregate demand for computers, and software sales began pushing the economy into greater debt, because the aggregate supply was greater than the demand, which caused more problems for investors, and how they were spending their money.

The financial crisis in 2008 that led to a crisis in the banking sector, and which nearly led to a complete collapse of the economy globally, was not only caused by changes in the regulatory, regulation and legislation oversight, but also fiscal and monetary policies. Many believe that, expansion of excesses monetary and irresponsibility of some of the government agencies led to the crisis. According to reports by Taylor (2009), excesses monetary policies were the main cause of the 2008 financial crisis. He reports that, in 2003-2005 the federal reserves held its interest rate target below the well known monetary rules that state that historical experiences should be the base of a good policy. He says that, Federal Reserve tracked their rates according to what worked better in the earlier decades, instead of lowering the rates in order to prevent the crisis.

Increasing the federal deposit insurance threshold from $40,000 to $100,000 meant thrifts could take on that additional risk, insinuating the moral hazard problem causing irrational behaviour. New laws implemented by the government meant they tried to resolve the crisis, making regulation of the industry tighter and forced thrifts to return to their original aim, to provide affordable home financing. The resolution to the crisis came in 1989 during the Bush Administration who demanded a huge bailout at the cost of the tax payers. The S&L crisis was branded as the one of the worst financial disasters to date, with many of the still solvent S&Ls being owned by bank holding companies instead of independency.

To even begin to think about possible solutions to the current state of the economy, one must first understand the origin of our problems. We are in a recession today because of a weak job market, risky mortgages, and a heavy reliance on faulty financial formulas in the stock market. For many people, it seems to be harder to get a job now than ever before. These feelings are well supported by cold statistics. Information gathered by the U.S. Bureau of Labor states that in 2006, about 5 million Americans were being hired every month.