VIETNAM NATIONAL UNIVERSITY

UNIVERSITY OF ECONOMIC & BUSINESS

FINAL ASIGNMENT
IN INTERMEDIATE MACROECONOMICS
Course code: 202 INE20102-E 4

TOPIC:

THE UNITED STATES FINANCAL CRISIS IN 2008

Lecturer: Phan The Cong, Assoc, Prof. Dr

Student: Tran Thi Thu Trang
ID student: 19051242
Class: QH-2019-E KTQT CLC 4

Hanoi, July 2021

Introduction

The financial system is one of the most important parts of the economy. The existence of the
financial system is an indispensable element of the market. Even a small change in this system can turn
into a big wave affecting both the economy of each country and the world economy. Therefore, if a
financial crisis occurs, the consequences will be huge and have extremely dangerous consequences for
the global economy.

Entering the 21st century, the world economy is developing continuously, developed countries
such as the US, Japan, and the EU region always achieve an increase in GDP and GNP. The growth
rate is always from 2% - 3% a year. However, accompanying that development is the risk and danger
of the financial crisis along with the inevitable recession of the economic development cycle after the
years of maximum development. With the seeds of the crisis in the past, 2007 marked a recession,
starting the signs of crisis of the world economy. Spending within a few months of the end of 2007 and
the beginning of 2008, the whole world witnessed the shaking of the US financial system - which is
considered the most powerful power in the world. This is considered the most serious crisis to occur in
the past 80 years. Hundreds of billions have been dissipated, the contagion has spread and affected the
whole world for many years.

Therefore, the essay will learn about “The United States financial crisis in 2008” with the hope
that it can help people better understand the crisis with its causes and impacts on the global economy.
Thus, we will have a more detailed view of the crisis and from there will find out lessons as well as
solutions to help the economy avoid the risks caused by the crisis. Thereby, each country will find for
itself appropriate policies to help overcome the crisis and develop its economy.

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1. Theory of Financial crisis

Discussing the development of a country, economy plays an important role in evaluating their
development after long a period of upheaval and long development, therefore it's undeniable that
almost country have to experience economic fluctuations and crises when developing their country.

According to Market Business News, the definition for’’ economic crisis’’ is a situation in
which a country’s economy deteriorates significantly during the crisis, GDP is typically declining,
liquidity dries up, and property and stock market prices plummet. It is an economic downturn that gets
worse and worse.

Financial crisis occurs when financial markets crash caused by adverse selection and moral
hazard become acute in financial markets, rendering these markets incapable of capital mobility.
efficiency from savers to potential investors. The result was an economic downturn.

- Signs of the Financial Crisis:

 Commercial banks failed to return depositors' deposits.

 Borrowers, including A-rated customers, were also unable to repay the bank's loans in full.

 The government abandoned the fixed exchange rate regime.

 Financial liberalization.

 Weaknesses in the financial system, especially domestic banks.

 Poor supervisory institutions.

- Types of financial crisis:

 Banking crisis: When a series of customers want to withdraw their deposit to the bank before,
the bank will have difficulty in lending. The main source of loans of the bank is from
customers' deposits. Therefore, when a series of customers ask to withdraw their deposits, the
bank is very likely to go bankrupt when the previous loan amount has not been recovered. If
this situation spreads, a crisis is likely to occur.

 Crisis in financial markets: Because some government policies and speculative bubbles lead to
a crisis situation in the financial markets. For example, when the state issues money to cover
debts, or when people rush to buy certain financial goods to speculate.

 World financial crisis: Countries with strong currencies have their currencies devalued. Or the
inability of a certain country to repay its national debts will cause a widespread currency crisis.
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  Financial crisis in economic groups: The crisis occurred in economic groups due to the
following reasons: incorrect investment, failure to recover the invested capital, failure to pay the
loan, being affected by the general crisis...

2. Overview of the economic crisis in the United States

Let take a glance at the United States -a country with a developed economy, which account for roughly
20% global economy (according to Business Insider posted on 22.6.2019) and back to 2007-2009which
marked an important milestone in the US economy, especially in 2008 when approximately 84,000 US
workers losing their jobs each month from January to September. According to Investopedia, the
financial crisis began as usual with good intentions but after deal with the bursting of the dot-com
bubble, a series of corporate accounting scandals, and the September 11 terrorist attacks, the Federal
Reserve lowered the federal funds rate from 6.5% in May 2000 to 1% in June 2003 in the purpose of
boosting financial by creating the monetary available to the businesses and consumers at make a loan
or debt from the bank.

The result was an upward in home prices because the debtor took advantage of the low mortgage rates.
Even subprime debtors who had lack of money or credit were able to perform the dream of buying a
home. The banks then sold those loans on to Wall Street banks, which packaged them into what was
billed as low-risk financial instruments such as mortgage-backed securities and collateralized debt
obligations (CDOs). Soon a big secondary market for originating and distributing subprime loans
developed. Fueling greater risk-taking among banks, the Securities and Exchange Commission (SEC)
in October 2004 relaxed the net capital requirements for five investment banks—Goldman Sachs
(NYSE: GS), Merrill Lynch (NYSE: MER), Lehman Brothers, Bear Stearns, and Morgan Stanley
(NYSE: MS). That freed them to leverage their initial investments by up to 30 times or even 40 times.

3. Causes of the economic crisis

It’s can be said that the financial crisis in the US was from the collapse of Lehman Brothers bank on
15/09/2008 with the loan of roughly 619 billion USD has a stroke on both United States and worldwide
financial. According to the balance report, Lehman used a high-leverage business model that required it
to raise billions of dollars every day to open. After the world financial crisis in 1997, many people no
longer had confidence in their country's banking system, they considered the US a country with a stable
financial background, so in 2002-2006 when monetary was cheap, and interest rates are very low so
people are encouraged to consume and easy to get credit. Therefore, people were excited to borrow
money to buy a house. This phenomenon led to the housing credit crisis. Some semi-public banks in
the real estate industry boldly lend money to make a profit, as is the case of two semi-public banks
Fanny Mae and Freddie Mac.

In mid-2006, when the US Federal Reserve Bank (FED) raised interest rates to hedge against inflation.
The investment bubble, real estate speculation began to burst because many people borrowed money
beyond their means, now could not pay their debts and their houses were foreclosed on. Only then did
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people discover that, among the debt packages in circulation, there were many "bad debts". it had
invested heavily in high-risk real estate and subprime mortgages. When these markets turned worse,
Lehman couldn’t raise enough cash to stay in business.

For more details according to the Financial News of BBC reports in October 2008:

 On 16/3/2008, Fed accepted JPMorgan Chase a loan of 30 billion dollars to acquire Bear
Stearns.

 On 7/9/ 2008, the United States government took over 2 banks named Freddie Mac and Fannie
Mae.

 Then in 15/9 Lehman brothers applied for bankruptcy with a loan roughly of 619 billion dollars,
Bank of America accepted to repurchase Merrill Lynch with over 50 billion dollars.

 Finally, on Sept. 16, 2008, the Reserve Primary money market fund "broke the buck." That
meant its shares, normally worth at least $1, were only worth $0.97.10 Investors lost confidence
in the money market fund when it announced losses of $785 million in Lehman’s commercial
paper.

 On Sept. 18, 2008, Paulson and Bernanke met with congressional leaders to explain that credit
markets were only a few days away from a meltdown. They asked for $700 billion to bail out
the banks, which would allow the Treasury Department to buy shares of troubled banks; It was
the fastest way to inject capital into the frozen financial system.

Therefore, from the bankrupt of Lehman Brothers, the finance of the US getting worse and worse
therefore the economy begun a crisis. Moreover, the financial crisis started from indirect and direct
reason:

After the collapse of the Lehman Brothers bank, the US economy entered a difficult time. The first
factor started in 2001. Inflation slowed down and interest rates fell, especially after the 9/11 terrorist
attacks. But the current financial crisis also begins here. That was the time when the Fed pumped
money into the US economy and gradually reduced the basic interest rate from 3.5% a year in August
2001 to 1% in mid-2003.Monetary easing has generally made it easier to borrow money from banks
and lower costs for the entire economy, but it has also devalued the currency and led to inflation.
Moreover, the Fed has kept interest rates so low for too long.

The second factor is that low-interest loans stimulate home buying. In 2006-2007, commercial and
investment banks eased home loans for less reliable borrowers. The Fed did not control these "double-
edged sword"-like realities. As a result, anyone can get a home loan, even if they are least able and
even unable to repay the loan. Low- interest rates caused many people to rush to buy houses, blowing
up the real estate "bubble". Rising house prices made banks feel safe to give money to those who could

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not pay their loans because banks assumed that, if borrowers defaulted, they would foreclose on their
homes for their value. pushed higher. Things went fine as long as house prices kept going up, but once
home prices peaked and started to fall, lending conditions tightened, and banks suddenly found
themselves owning homes whose value is not enough to cover the value of the loan.

The third factor is the answer to the question of why a powerful financial system is in trouble when
real estate credits (formed by home loans) in the financial market. the US itself is only about 500
billion USD - a small number compared to the capacity of the market?

To answer the above question, many economists analyze: First of all, we have to start explaining
leverage in the business. When the business is profitable, anyone can think of borrowing more money
to develop the operation. This is called the leverage effect of borrowed money. But when borrowing,
there must be something as collateral. In the U.S. financial system, this security is often a package of
debt or a note that stipulates that an asset will become liquid, cash, at maturity.

Imagine that the debt package is a "cocoon" with many layers, inside containing many types of real
estate credit debt. The real estate finance company took a commission from the customer after taking
the note, they sold the deed to another financial group. This consortium gathers those debentures into
packages like a cocoon, inside there are all kinds of bad and good and uses them as collateral to borrow
more money to continue doing business in other fields. Banks and financial investment complexes have
exchanged these "rotten cocoons" in tangled relationships like silk without being able to know exactly
how bad and good inside. The bank's balance sheets were filled with mortgages, encircled in complex
forms that made risk assessment extremely difficult. Firms that specialize in asset valuations are also
dubious and are bullish on valuations.

When home prices peak, loans slow down and home prices start to fall. The housing "bubble" burst
in the last months of 2007 and banks with large mortgages were forced to publish reports of huge
losses. After seeing the true value of the property they hold, no one wants to embrace those "rotten
cocoons" anymore. The real estate credit crisis that led to the crisis of the debt market is the bond
market. As a result, illiquid banks or financial institutions fall into a situation known as a technical
default - having assets that can't be converted to cash because they're outstanding. In addition to the
panic of the people, because they are afraid that the bank will default, their deposit will be lost, so they
pull together to withdraw money, leading to bank bankruptcy as in the case of Bear Stearns- the first-
class bank in US financial market. The Fed's easing monetary policy, which began late last year to
avoid an economic slowdown, has now caused inflation, not helping the US economy recover. Oil,
food, and gold prices rose to historic highs and the dollar also depreciated to unprecedented levels.
Many analysts believe that if the monetary policy continues to accelerate, it will not be able to prevent
the risk of collapse, but will also create a situation of inflation and economic decline.

4. Impacts

4.1. Financial impacts

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 The biggest and heaviest consequence is to destroy the productive forces and push back the
development of the world economy. First of all, for the United States. In the United States, the financial
crisis turned into an economic crisis, production declined, unemployment increased, thus being
considered a "3 in 1" crisis. The crisis bankrupted a series of banks and financial companies, including
leading banks and financial companies in the United States. Bear Stearns - one of the leading securities
brokerages and investment banking groups on Wall Street, has been operating for 85 years in the US
financial market, suffered heavy losses when the housing market fell, on March 16 2008 declared
bankruptcy, was bought by Morgan Chase for $2 a share. Lehman Brothers, the fourth-largest
investment bank on Wall Street with 158 years of operation, on September 15 2008 had to file for
bankruptcy protection due to losses, total debt amounting to $ 768 billion. Bankruptcy losses also
occurred with a series of other large banks and financial companies such as Indy Mac Bancorp Inc,
Freddie Mac, and Fannie Mae, Merrill Lynch & Co, City Group, National Bank of Commerce, Bank of
Clark Country...

4.2. stock impacts

The US stock market wobbled, many stocks fell dramatically. Before the bankruptcy, shares of
Lehman Brother bank fell 94%, shares of Freddie and Fannie fell 90%; from the beginning of 2008 to
March 2009, AIG's shares fell 79%; shares of City Group, Bank of America, Goldman Sachs fell more
than 60%, etc. All four important indexes of the US stock market, namely the Dow Jones, S&P 500,
Nasdaq, and FTSE indexes all fell seriously, a dramatic decline. The sharpest decline since the 1930s.

Production and consumption in the US also fell into a very difficult situation. The auto industry, one of
the most important manufacturing sectors in the U.S. economy, saw sales plummet. The top three
American automakers, General Motors, Ford, and Chrysler, all suffered heavy losses. In January 2008,
Nortel Networks Corp, one of the largest telecommunications equipment corporations in the US, in
February 2008, Lyondell Chemical, one of the largest chemical manufacturers in the US, had to file the
insurance claim. After the financial crisis, the agencies had to change their policies after the economic
recovery. Because large corporations are affected, they have to change their policies on employees,
human resources and reduce production output to limit losses. Since then, the problem of
unemployment has become a concern

4.3. Unemployed

According to the report of the US Department of Labor, unemployed workers are mainly
concentrated in the service sector, accounting for 80% of the labor force, with 273 thousand people,
followed by the manufacturing and manufacturing sectors (149 thousand people). due to the bad impact
of the automobile manufacturing industry, the construction industry (101 thousand people), the retail
sector (67 thousand people) ... Some fortunate people were not fired, but their working hours were
reduced. In December 2008, the average number of hours worked per week for American workers fell
0.2 hours to 33.3 hours, the lowest level since the index was introduced in 1964. The rapid increase of
Unemployment in this country has surprised many economists. In fact, the unemployment rate in 2008
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was 0.2% higher than economists predicted. Unemployment increased due to the economic recession,
on the contrary, the unemployment rate also created a negative impact on the US economy. According
to the financial report, the economic recession and a serious decline in consumption caused a series of
large US retail companies such as Circuit City Store Inc, Sharper Image Corp, Steve & Barry's LLC,
Macy Inc, Ann Taylor Stores Inc. … go bankrupt or file for bankruptcy protection. Production
stagnation, layoffs caused the unemployment rate in the US to increase month by month and reach a
25-year high, from 2.59 million people in 2007 to 3.84 million people in 2008 and 4.61 million people.
2008 in February 2009.

From the US, the crisis has shaken the financial market, the stock market, bankrupted many
banks, financial companies, many large economic groups in many countries around the world, causing
financial services to decline. seriously reduced. international trade, financial and investment relations,
and the world economy in general. Royal Bank (Scotland), Kaupthing, Landsbanki, Glitnir (Iceland),
Northern Bank, mortgage lender Bradford & Bingley (UK), IKB Bank, DZ Bank, Deutsche Bank,
Saxony LB (Germany), Yamato Life Insurance Co (Japan)… and many other banks were victims of the
US financial crisis, forced to seek help from the government or nationalized by the government.

Research by the Asian Development Bank (ADB) shows that in 2008, the global economic
crisis cost the world's total financial assets a loss of 50 trillion USD, of which developing countries in
Asia were hit the hardest with total losses amounting to $9.6 trillion, which is higher than the total GDP
in a year for these countries. Although only more than 20 countries have officially declared themselves
in recession, the reality is that most countries in the world are affected, experiencing difficulties and
slowing growth to varying degrees. According to a forecast of the World Bank (WB), in 2009, the
world economy will grow by only 0.9%, the growth rate of OECD countries is -0.3% (in which, the US
is - 0. 9%, euro area - 0.6%), the growth rate of emerging and developing economies is only 4.5%…
World economic forecast of the International Monetary Fund, Organization for Economic Co-operation
and Development (OECD), Citi Group, or Reuters also had a similar downward trend.

Another consequence of the current global financial crisis and recession is the bankruptcy of the
liberalizing economic policy that the United States has carried out for many years and wants to impose
on the world. After the crisis, in the US and around the world, the economic policies of governments
will be more balanced between market regulation and state regulation; the state's economic intervention
and regulation in the economy will be more; The State's supervision over business activities of
enterprises, especially the financial system, banking, and the stock market will be stricter than at
present.

From there we can see, the financial crisis caused the US to have heavy economic and
employment consequences. thereby posing challenges, forcing the US to seriously change its policies

4.4. The capital impacts

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 According to the financial report, the economic recession and a serious decline in consumption
caused a series of large US retail companies such as Circuit City Store Inc, Sharper Image Corp, Steve
& Barry's LLC, Macy Inc, Ann Taylor Stores Inc. … go bankrupt or file for bankruptcy protection.
Production stagnation, layoffs caused the unemployment rate in the US to increase month by month
and reach a 25-year high, from 2.59 million people in 2007 to 3.84 million people in 2008 and 4.61
million people. 2008 in February 2009.

From the US, the crisis has shaken the financial market, the stock market, bankrupted many
banks, financial companies, many large economic groups in many countries around the world, causing
financial services to decline. seriously reduced. international trade, financial and investment relations,
and the world economy in general. Royal Bank (Scotland), Kaupthing, Landsbanki, Glitnir (Iceland),
Northern Bank, mortgage lender Bradford & Bingley (UK), IKB Bank, DZ Bank, Deutsche Bank,
Saxony LB (Germany), Yamato Life Insurance Co (Japan)… and many other banks were victims of the
US financial crisis, forced to seek help from the government or nationalized by the government.

Research by the Asian Development Bank (ADB) shows that in 2008, the global economic
crisis cost the world's total financial assets a loss of 50 trillion USD, of which developing countries in
Asia were hit the hardest with total losses amounting to $9.6 trillion, which is higher than the total GDP
in a year for these countries. Although only more than 20 countries have officially declared themselves
in recession, the reality is that most countries in the world are affected, experiencing difficulties and
slowing growth to varying degrees. According to a forecast of the World Bank (WB), in 2009, the
world economy will grow by only 0.9%, the growth rate of OECD countries is -0.3% (in which, the US
is - 0. 9%, euro area - 0.6%), the growth rate of emerging and developing economies is only 4.5%…
World economic forecast of the International Monetary Fund, Organization for Economic Co-operation
and Development (OECD), Citi Group, or Reuters also had a similar downward trend.

Another consequence of the current global financial crisis and recession is the bankruptcy of the
liberalizing economic policy that the United States has carried out for many years and wants to impose
on the world. After the crisis, in the US and around the world, the economic policies of governments
will be more balanced between market regulation and state regulation; the state's economic intervention
and regulation in the economy will be more; The State's supervision over business activities of
enterprises, especially the financial system, banking, and the stock market will be stricter than at
present.

From there we can see, the financial crisis caused the US to have heavy economic and employment
consequences. Thereby posing challenges, forcing the US to seriously change its policies

5. Government’s policies

After the economic and housing crisis, the United States economy shrank significantly by a
negative 0.3% in the third quarter of 2008. Consumer spending contributed two-thirds of economic
growth in the US. The United States shrank by the most since 1980. The federal budget deficit in fiscal
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2008 rose to a record $454.8 billion, more than three times the deficit of $161.5 billion in fiscal 2007,
mainly due to a sharp increase in defense spending, especially for the two wars in Iraq and
Afghanistan. The federal budget deficit for the fiscal year 2009 is forecast to reach $1 trillion.
According to the US Department of Labor, the current unemployment rate in the country is 6.5%, the
highest in 14 years. According to forecasts, the US economy will continue to decline in 2009, the
unemployment rate may rise to 8%, while reserves and real estate values drop sharply, the confidence
index of the American people decreases, down to a record level

5.1. the policies

To get out of the financial crisis, the G. Bush administration launched a $700 billion bailout
program that Congress passed after many revisions. The US Treasury Department plans to sell bonds
worth a total of 55 billion USD, including 3-year bonds to meet the massive borrowing needs of banks.
In the immediate future, it is necessary to approve a new $61 billion relief package for the
unemployment insurance program to improve living conditions for the poor. Deeper and deeper into
the crisis, but until the end of 2008, the US has not agreed on how to use the financial bailout worth
700 billion USD. While the Bush administration wants to save the banks, Congress wants to save
families from foreclosure, President-elect B. Obama wants to save the auto industry first from the brink
of bankruptcy with a bailout. 25 billion dollars. From the US economic crisis in 2008, not only the US
auto industry was affected (Total losses of GM, Ford, and Chrysler corporations amounted to 28.6
billion USD in the first six months of this year) but the US auto industry was also affected. the Auto
industry in countries such as Toyota (Japan) also reduced profits by 39%. Not only that, in auto-
producing countries like that, it also decreased by about 66.8%. Automakers have asked the
government for help. GM, Ford, and Chrysler have asked for $34 billion. On December 10, the US
House of Representatives passed a bill to restructure and finance the auto industry worth $ 14 billion.
According to House Speaker Nancy Pelosi, the passage of the bill will create momentum for the auto
industry as well as the US economy to recover. However, on December 11, the US Senate voted
against the plan to rescue the country's auto industry. This is a blow to the leading car companies in the
US, which are running out of cash after a long time of trying to call for help. The European auto
industry hopes to borrow about 40 billion euros to improve the situation, but according to the latest
news, they will only be granted 5 billion euros.

The US government has outlined how to improve the banking system, combat the lack of
transparency in financial markets and improve financial regulations, proposing to create a supervisory
team to supervise 30 banks. After a rescue plan worth up to $ 700 billion, the latest step in a series of
tests to support the US Government is the plan of the Department of Finance, the Fed, and the US
Federal Deposit Protection Corporation. 24-11 to support Citigroup, a financial group that failed to
recover from the crash, can give the economic foundation as well as the wobbly financial system of the
US. The plan includes buying $20 billion worth of Citigroup shares as well as insuring hundreds of
billions of dollars in asset risk. The plan includes buying $20 billion worth of Citigroup shares as well
as insuring hundreds of billions of dollars worth of risky assets. According to FED Chairman Ben
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Bernanke, the FED will probably announce a reduction of the basic interest rate by at least 0.5
percentage points, from the current 1% (the eighth rate cut in 2008). On December 4, the European
Central Bank (ECB) decided to cut the key lending rate by 75 percentage points, to 2.5%. The Bank of
England (BoE) announced a 100-point (1%) cut in the prime lending rate, to 2%, the lowest level since
1939. The central banks of Canada, Sweden, and Switzerland has taken similar steps: The Swiss
Central Bank (SNB) unexpectedly announced a reduction in interest rates to 1% - a record reduction for
this bank. Sweden's Riksbank decreased from 4.75% to 4.25%. After bailing out several banks on the
brink of bankruptcy to avoid the knock-on effect, governments have revised current regulations and
raised deposit insurance levels to protect their interests. depositors, preventing the risk of a mass
withdrawal of people's deposits at financial institutions. In addition, central banks of other countries
have cut interest rates, reduced the required reserve ratio, and even injected hundreds of billions of
dollars into the financial-banking system. On the other hand, after offering a rescue package of 700
billion USD two months ago, the US also intends to provide 150 billion USD into the financial system.
So how did the US use these bailout packages?

 October 14, 2008: The US government uses 250 billion USD in 700 billion packages to buy
back shares of some important banks.

 November 9, 2008: Insurance giant AIG has more financial support from the US Government,
bringing the total amount of relief to $ 150 billion.

 November 12, 2008: Authorities abandoned a plan to use part of the $ 700 billion to buy back
bad loans of banks. Instead, it will focus on buying shares of troubled lenders. - November 25,
2008: A new solution package with a total amount of up to 800 billion USD is announced. In
general, we can see, the US solves the economic crisis starting with the relief of the
headquarters, the auto industry, and the big banks that influence on the United States and the
world.

 January 13, 2009: US President-elect B. Obama asked the National Assembly of this country to
disburse another $350 billion in the Troubled Asset Relief Program (TARP) worth 700 billion
to help the United States cope with deal with the financial crisis.

 January 15, 2009: The US Senate voted to allow the government to further disburse $350 billion
in economic stimulus with a vote-to-vote ratio of 52/42. The other half of the $700 billion
economic stimulus package has been approved to buy back struggling assets in the US.

 Early February 2009: U.S. Treasury Secretary Timothy Geithner unveiled a comprehensive
bank bailout plan worth at least $1.5 billion with the goals of reviving credit markets and
strengthening credit. stock banks and actively support homeowners and small businesses; and
with this implementation is the adoption of new and higher standards of transparency and
accountability.

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 It can be seen that the US has applied an expansionary fiscal policy, combined with an
expansionary monetary policy when the economy is in crisis to shift the aggregate demand curve
through government spending and funding banks to stimulate private investment activities.

Expansionary fiscal policy under floating exchange rate system of US

 Initially the US economy is at equilibrium A. The US government conducts expansionary fiscal

policy (G↑). The IS curve shifts to the right. The economy reaches the internal balance at B.
R2 > r1: interest rate increases → CI increases → demand for domestic currency increases. 
Y2 > Y1 : income increases → import increases → supply of domestic currency increases.

 Foreign exchange market:

Supply of domestic currency: Sdc = M + CO
Demand for domestic currency: Ddc = X + CI

Expansionary monetary policy under floating exchange rate system of US

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 When the government uses expansionary monetary policy by increasing the money supply, the
LM1 curve shifts right to LM2, the economy is in equilibrium at B, output increases from Y1 to Y2, the
domestic interest rate falls from r1 to r2 so the exchange rate tends to increase. An increase in the
exchange rate means that the domestic currency depreciates, thereby increasing net exports. Thus, the
amount of net foreign currency inflow increases, the IS1 and BP1 curves shift to the right to IS2 and
BP2, the new equilibrium point is C. Therefore, in the short run, monetary policy has a strong effect in
the rate mechanism floating price.

5.2. Results of the policies

After proposing a plan to rescue the government, banks, corporations, the auto industry in
general, everything affects the country's economy with a support package roughly 800 billion USD, so
what difficulties the United States had to deal with? It is undeniable that there were difficulties and
disagreements on the part of the government during the discussion on the allocation of subsidies:

Firstly, the presidential candidates are having a battle around economic policy, focusing on two
issues: energy prices and taxes. Senator McCain- the Republican candidate, caused a stir when he
propagandized for a temporary moratorium on the federal gasoline tax for the summer because he
wanted to develop nuclear power, exploit more oil in the continental shelf of the US.

Meanwhile, the Democratic nominee, Obama wants to be closer to cleaner energy, levy special
taxes on oil companies and invest $50 billion in "energy independence." Senator Obama and many
Democrats in Congress want an additional up to $50 billion, besides $168 billion package already in
effect in order to help people escape the risk of losing their homes. Mr. Obama wants to abolish "tax
relief for the rich" of G. Bush government law and decrease the tax to the "middle class" whose income
nearly $250000. However, Mr. McCain reversed his previous position, he wanted decrease tax for the
rich, which he said would help small businesses and create more jobs. Therefore, he attacked the
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''swine'' politics, a game played by congressmen to take money from the people to benefit their
constituencies.

On the other hand, Mr. Obama emphasized that the government should encourages people to
sign up for private health insurance and pension benefits instead of depending on the government.
Nevertheless, he has also suffered pressure from within the party because they want him to solve the
lack of medical care, pressure from unions that want him to work hard to protect American jobs.
Furthermore, he suggested that expanding health care to all children could cost at least $100 billion a
year. But many entrepreneurs also concerned that he supports the renegotiation to include more
provisions recognizing workers' rights.

Finally, Senator McCain also have to satisfy two opposite factions, many traditional
Republicans believe in small government, low taxes, and a balanced budget. But the incumbent
Republican government has increased the living standard, especially on defense, and decrease taxes so
many Republican businessmen resent the argument that uninformed homebuyers should also be
supplied. However, the rest of Democratic believe that the big banks and irresponsible shareholders
during the crisis should be abolished rather than saved by the Treasury Department.

From all of the polices did by the government we can see, the shortcoming that the US
government faced in the process of bailing out the economy in 2008 is the disagreement of government
employees and the president when it has to fully meet the needs social security, health, employment
and economic demand etc., of the residents

5.3. Suggestion for the government

After the policies proposed by the US government to restore the economy, we can see some
good progress next year as follows:

According to IMF, the US economy is unlikely to recover before 2010. One of the main reasons
for the slow recovery of the world's leading economy is that consumers tend to save money instead of
spending. According to economists, consumer spending accounts for nearly 70% of the value of the US
economy. Therefore, as the proportion of consumer spending put into saving increases, the rate of
economic development will slow down. Some economists believe that the scope of the financial crisis
is deepening, so they call on the government to come up with a second economic stimulus package,
after the 787 billion economic rescue packages. USD was approved last February. However, the plan
was encountered with fierce opposition from Republican congressmen. They think that the increase in
the unemployment rate proves that the first economic stimulus package has failed. Last June,
employers had to cut 467 thousand workers, one of the reasons that pushed the unemployment rate to
9.5%, the highest level in nearly 26 years. Congressman McConnell, the minority leader in the Senate,
thinks the idea of a second stimulus package is worse than the first.

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 In conclusion, despite using a large amount of capital, the US still faces difficulties when it comes
to recovering its economy in restoring the auto industry, increasing jobs for the unemployed. Although
it is not possible to restore the economy and develop immediately, the US has partly prevented the
failure of big banks as well as housing problems.

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6. Conclusions

After the currency crisis, the stock market in the US as well as in Europe, Asia, and Southeast
Asia have to lend themselves to enormous effects. At that time, the governments of other countries also
announced to lower the economic growth target in 2009.

Monetary tightening and slowing global demand dampen consumer and investor confidence,
which harms the region's manufacturing and exports sectors.

In general, the negative effects on the countries that suffer are the rapid acceleration due to economic
recovery, low employment, up or down prices such as housing, monetary.

The echoes of the 2008-2009 global financial crisis are still there and through that, countries
need to learn lessons for themselves. The first lesson to be learned is that each country's economy must
ensure macroeconomic stability, which is a prerequisite for mitigating the impact of the crisis. In
addition, countries need to have strong financial institutions that cannot be compromised for any
reason. Moreover, it is necessary to develop a sound monetary-financial policy framework. The fact
that governments store large foreign currency reserves is not beneficial to the operation of the financial
system and the global economy. This only helps to limit, but not guarantee, a country can stand firm in
crisis, when international trade declines, import prices rise sharply and investment capital is withdrawn.
Instead, countries need to insure themselves against crises by building a sound economic-financial
policy framework.

In the world, there are currently some signs showing the risk of a new financial and monetary crisis if
countries do not take timely preventive and preventive measures.

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Reference:

1. Asian Development Bank Report: Global economic crisis and emerging economies: negative
effects and losses. (March 2009).

2. Austin Murphy (2008), An Analysis of The Financial Crisis of 2008: Causes and Solution,
Small Business Administration – SBS Publication, USD.

3. Financial Times: "US consumer prices slide 1.7%". December 17, 2008.

4. Michel Beaud and Gilles Dostaler (2008), Economic thought from Keynes, Tri Publishing
House, Hanoi.

5. The 2007–2008 Financial Crisis in Review. (2021, January 11). Investopedia.

https://www.investopedia.com/articles/economics/09/financial-crisis-review.asp

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