Lehman Brothers which was one of the biggest banks in the United States filed for bankruptcy protection on September 15, 2008. After the bankruptcy of this bank, the economy of U.S. has suffered from severe unemployment low economic growth, and budget deficit. Technically, the economy status of the United States was slowing before Lehman Brothers filed for bankruptcy protection. The economy of United States has been suffering from Subprime Mortgage crisis. “The subprime mortgage crisis appeared to lay claim to at least two major financial institutions [Lehman Brothers and Merrill Lynch] and seemed poised to take down a few more” (Temple-Raston, Par. 2). As the financial crisis from the United States spread to the world, world citizens seriously started to worry about how the economy of the world survive in this crisis. So, what should be done about the budget deficit to deal with this crisis? The government of The United States of America should promote American economic growth by spending more government spending and purchasing local banks’ securities to encourage local banks to loan money and increase money in the U.S. market.
When the government decides to spend more, it helps the employment rate go up. For example, when the government spends more money to build public facilities, unemployed people will be hired, as it makes the employment rate go up. The new employees will pay taxes after the stimulated economic growth and this helps resolve the budget deficit. However, government spending would not be the answer when it is executed poorly. “Infrastructure spending can help only if the project is worthwhile on a cost-benefit basis (that is, if it should be done anyway). Its value must be above its construction costs, because the taxes raised to pay for it will hurt GDP” (Entin, Page 10).
Government spending on the investment to promote and solidify companies also helps economic growth to get better. The principle is simple: When companies have enough in their budgets, they invest this money into promoting new and outstanding projects. These new projects demand more employees, so companies have the incentive to hire new employees. These employees will pay taxes, and help government resolve the budget deficit. However, this investment does not always have the positive returns.
I [Catherine Austin Fitts] lead an analysis of US federal expenditures and credit activities in the Philadelphia area for a group of US pension fund leaders. After analysis of the detailed data resulting from $10 billion of government reengineering and $400 billion of federal credit portfolio strategy managed by my company, the evidence was overwhelming -- the federal investment in Philadelphia had a negative return on investment. In short, government budgets were rigging profits and income for companies and people in the area. After each year of government investment, Philadelphia spent more time doing things that were fundamentally not productive and so had been paid to grow "stupider" (Fitts, Sec. 2).
One of the most outstanding characteristics of this recession is that the banks are not willing to loan. They tend to make stricter loan programs because money circulation in a recession is much less than in an average economic growth or economic boom. In short, there are more possibilities for loan default from the borrowers in a recession.
However, there is no doubt that a loan is one of the most powerful tools to stimulate money currency. The Federal Reserve also realizes the importance of loan programs. “The Federal Reserve’s Ben Bernake sent a letter to the Senate Banking Committee announcing a new loan modification program to help keep struggling homeowners in their homes” (Bedard, Par. 1).
Here is a dilemma for the banks. When they loan money under the guidelines of the Federal Reserve, the possibilities to make profits would get worse and worse, finally, some of them would face challenges like Lehman Brothers and Merrill Lynch. These banks are also companies which are supposed to make profits, and as much as they can. They also would not want to be bankrupt. The Federal Reserve has control structure over the local banks, but they do not guarantee their profits or protect against bankruptcy. Therefore, it is a good idea to buy banks’ securities to encourage banks to loan, but it is not ideal.
American economic growth will overcome this budget deficit by stimulating economy, by funding more government spending and purchasing local banks’ securities; this encourages local banks to loan money. It is said that this economic situation is the biggest crisis of the U.S. since the Great Depression. The U.S. overcame the Great Depression with New Deal policies, and now, the U.S. is one of the strongest countries in the world. If it continues to show into a deeper recession, its deficit and national debt will grow even faster.
Bedard, Moe. “The Federal Reserve Implements Loan Modification Program.”
Loanworkout.com. January 29, 2009. April 16, 2009. .
Entin, Stephen J. “Do Government Spending and Tax Rebates.” CATO Institute Capitol Hill
Policy Breifing. December 18, 2008. April 16, 2009. .
Fitts, Catherine Austin. “The American Tapeworm.” Solari. April, 2003. April 16, 2009.
Temple-Raston, Dina. “Foundering Wall Street Giants Seek Help, Cash.” National Public
Radio. September 15, 2008. April 16, 2009. .