“The force of the global recession is receding,” Treasury Secretary Timothy Geithner announced recently. “Global trade is just starting to expand again. But the “process of repair and recovery is going to take considerably more time. It seems realistic to expect a gradual recovery, with more than the usual ups and down and temporary reversals.” Americans are beginning to get impatient as foreclosures and joblessness increases. In fact, many people are starting to learn more about macroeconomics and economics statistics to try ascertaining how we got into this mess and how we might get out.
Macro-economics gained traction in the thirties as basic economics shifted toward understanding the causes of the Great Depression. British economist John Maynard Keynes emerged as the dominant theorist of the time, espousing his view that private sector decisions had brought down the economy as a whole. An additional reason for economic downturns was a reduction in aggregate demand, Keynes argued. So a government could then focus their policies on creating more demand (hence, tax cuts and stimulus checks). Furthermore, the government could reduce interest rates and invest in infrastructure to further aid the ailing economy. Keynes believed that economic intervention, which involves targeting taxes, handing out tax credits, legislating minimum wage, subsidizing select commodities, capping prices, setting production quotas and regulating tariffs, could ultimately prevent another Great Depression.
Another concept of macroeconomics that applies to recessions is called monetary policy. Unlike fiscal policy, which is regulated by the President and Congress, monetary policy is regulated by the Federal Reserve System, the nation’s central banking institution. During a recession, the Federal Reserve has the power to reduce the reserve ratio or lower the federal funds rate, which lets banks keep more of their assets as accessible money, rather than reserves, thereby offering more attractive loans to customers and keeping economic growth high. Another action the Federal Reserve may take is to lower the discount rate on federal loans, which can free up money for banks that have borrowed from the Reserve, thus offering consumers better loans. Lastly, the Federal Reserve may save its own money to buy government bonds and put more money into the economy. While some of these actions may sound good, they must be careful not to meddle in free markets too much or the economy may wind up in worse shape than before.
So what have macroeconomics followers learned from this mess? Maybe it’s time for new economics theories to take hold, rather than simply drawing on the economics history of the past. “Economists need to reach out from their specialized silos: macro-economists must understand finance, and finance professors need to think harder about the context within which markets work. And everybody needs to work harder on understanding asset bubbles and what happens when they burst,” suggests a July 16th 2009 article in The Economist, “For in the end economists are social scientists, trying to understand the real world. And the financial crisis has changed that world.”
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