The Factors Contributing to the Recession in America

The past several years have resulted in what many call a significant recession in both the global and US economies. Many factors contributed to the recession in the US economy, including problems with defaulting credit as well as the burst of the housing market bubble and its effect on both the small (homeowners) and the large (big financial institutions). While many people may argue about the ‘true’ cause(s) of the recession, economic indicators and statistics clearly show the depth of the recession and how changes in the past year have affected it.

First, consider the unemployment rate. The most recent data, from May 2010 shows that the unemployment rate is 9.7%. While this value has retreated slightly from the high of 10.1% in October 2010, it remains one of the highest monthly unemployment rates in the past 10 years. It is important to note that the unemployment rate has been higher than 9% since May 2009. One could then conclude that many policies/initiatives to help create more jobs and to help stem further job losses in the past year have not effectively corrected the high unemployment rate.

While many consider the worst of the recession to be over, the high unemployment rate is cause for worry, and as such, further efforts are needed in this area.

Another item to consider is the cost of living.

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While it is very difficult to create a quantitative cost of living when factoring in such things as education, safety, health, water quality, etc, one can consider the cost of everyday goods (such as food, clothing, and common services) to get a general idea of the cost of living. For this, we refer to the Consumer Price Index (CPI). Recent data shows that of May 2010, the CPI decreased sed 0.2%. While this may first appear to be good news (in that CPI did not drastically increase indicating high inflation), it can be viewed as bad news, particularly if the CPI continues to decrease. A consistently decreasing CPI would indicate that the cost of specific goods/services is decreasing over time. This could lead to a situation whbusinessesness cannot operate as profitably as before, which would cripple business spending. While there is good news that there is no runaway inflation, the CPI (and ultimately the cost of living) needs to be watched to ensure that deflation does not become a problem.

Another area of concern relating to the US economy being in a recession is the Gross Domestic Product (GDP). A look at GDP values for the past few years shows that there was negative growth from the 3rd quarter of 2008 through the 2nd quarter of 2009. GDP began to rise in the 3rd quarter of 2009 and has continued, with a 2.7% increase in the first quarter of 2010. These increases show positive growth for the US economy, in terms of goods and services, is produced, and help indicate that the worst of the US recession may be over. However, the growth does not yet fully account for the declines in GDP occurring in 2008/2009, and when coupled with the high unemployment, indicates that the current economic recovery is fragile and needs constant attention to ensure that the economy does not slip back into recession.

In to response the responder-changing economic climate, the Chairman of the Fed, Ben Bernanke, has many tools at his disposal. One such tool, open market operations, can be used by the Federal Reserve to reach its monetary policy objectives. Open market operations include the buying and selling of government government-backed including treasury bonds, notes, and bills,s. These transactions occur with primary dealers, who are government securities dealers with an established trading relationship with the Federal Reserve. The buying and selling of government government-backends allow the Federal Reserve to affect the supply of reserve balances in the banking system, which is used to reach monetary policy targets. Specifically, the open market operations can be used to raise and lower targeted interest rates.

In considering a targeted interest rate that is higher than the Federal Reserve desires, the Fed will use open market operations to increase the money supply via a repurchase agreement (repo). A repo allows a borrower to use financial security as collateral to receive a cash loan at a fixed rate of interest from the Federal Reserve. Then, the borrower agrees to buy that same financial security from the lender at a later date at a fixed purchase price. (The difference between the two prices can be considered the interest rate). In this way, the borrowers are given a cash loan, at a fixed interest rate, which increases the money supply and ultimately will work to lower the targeted interest rate.

Considering the other case, where a targeted interest rate is lower than the Federal Reserve desires, the Fed can use open market operations to decrease the money supply via a reverse repurchase agreement (reverse repo). In a reverse repo situation, the Federal Reserve borrows money from the primary dealers using financial securities as collateral.

Similar to reports, the Federal Reserve agrees to buy back the financial security at a fixeperiodme for an agreed-upon price. This act removes money from the m market and works to increase the targeted rate of interest.