What Did the US Government to Combat the GFC Back in the Day?

Question by Jack: What did the US Government to combat the GFC back in the day?
Did they make some fiasco policies to make the situation better? (here in Australia we had some fiasco and monetary policies like the Reserve Bank decreasing the interest rates (OCR) to get people spending again, we also had stimulus package.) What policies did the US Government implement? Was it successful?

Best answer:

Answer by Matt M
First of all I love the term “fiasco policy.” I think that should be used more here.

Anyway, the U.S. certainly has measures to combat a “GFC,” especially since the U.S. had a hand in most of the other ones that have happened over the last 100 years. We have a reserve bank too, it’s called the Federal Reserve or just the “Fed” for short. It was set up like it is now in 1913, before the GFC that americans call “The Great Depression” in the 30s. They set reserve requirements for banks of course, and interbank lending interest rates and can effect the money supply and thus interest rates through open market operations (the buying and selling treasury bonds). What’s interesting about the fed is that the government appoints a chair (who’s usually just the smartest economist available I think) but after that the government is not allowed to intervene in Fed activities, so the fed is an independent agency outside of the government. The fed however can tell the treasury to print money that it can buy bonds with. Anyway the fed, through open market operations, reduced interest rates to about 0 recently.

Now, we also have this government corporation called the FDIC (Federal Deposit Insurance Corporation) that insures all bank deposits of 100,000USD or less. If your bank fails, they’ll give you the balance in your account up to 100K. This was created during the “great depression,” in the 30s and it was intended to prevent bank runs during a credit crisis. I guess it worked, because there weren’t any bank runs during the recent credit crisis.

During the great depression, the government under president Roosevelt, spent what would now be about 500B on Keynesian type fiscal programs that offered public assistance to people who were extremely poor and public works projects like the hoover dam so the more than 25% of the workers that were unemployed at the time could earn an income. Social Security also started then, which is a trust that gets funded by citizen payroll taxes. Social Security pays for social insurance like unemployment insurance, disability insurance, medical insurance for the poor/old, and straight up cash transfers for anyone 65 and older (and desperately poor people temporarily.) A law enforcing agency called the Security Exchange Comission was also created during this time, which polices the finance industry and tries to regulate out systemic risk, but only enough to keep financial products sold to customers around the world profitable. The chairmen of the “SEC” is appointed by and answers to the president by the way.

So recently there were some fiscal stimulus packages and bank bailouts responding to the sub-prime mortgage crash/credit crunch. First there was the Emergency Economic Stabilization Act of 2008, where the government bailed out a bunch of banks, manufacturers and financial services companies, buy loaning them money and purchasing their defaulted loans. They spent 700B on that, and it’s looking like soon the treasury will be getting some of it back. The Fed also loaned some bail out money to some financial services companies so their assets could be purchased and broken up more easily. I guess that worked too.
In 2009, the government passed the American Recovery and Reinvestment Act. It will payout a little under 800B which is directed mostly at prolonging unemployment benefits (18months + instead of just 6), individual state government treasury bailouts and tax credits for lower income workers (which are basically just public assistance transfers). The rest will go to some educational, heal care, infrastructure and energy projects/programs.

So that’s what we’re doing in the United States. I hope Australia is better than here, because in the United States there are thousands of really smart people, just out of college who can’t even get a job at KFC (so they stay up all night and respond to questions on yahoo).

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