Economic Policy Recommendation Essay.

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Assignment : Economic Policy Recommendation 1. Briefly describe the economic problem you have selected: Economic Growth 2. Assess the impact the problem poses to society. 3. Design an economic policy solution to the problem. 4. Analyze the economic theory used to complete the policy solution and determine the impact on the appropriate stakeholders. 5. Analyze how the economic policy proposed would impact the market or solve the economic problem. 6. Use at least five (5) quality academic resources. Note: Wikipedia and other Websites do not qualify as academic resources. The specific course learning outcomes associated with this assignment are: • Analyze the economic impact of major social problems and issues such as poverty, discrimination, crime, income distribution, the role of government, and other major issues. • Assess how the economic behavior of individuals, businesses, and governments can affect economic growth, social well-being, and the quality of life. • Use economic analysis to describe the social costs and benefits of government and public policy choices. • Analyze the relationship between economic activity and the resources available in a society. • Appraise the role of large firms in terms of economic performance and social impact. • Assess the major economic and related social issues associated with production, resource markets, and international trade. • Use technology and information resources to research economic problems and issues.

 

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In order to explore the subject of economic policy recommendation, it would be important to highlight some of the economic problems facing the contemporary world. By focusing on an economic problem, an economist would be able to assess the impact it poses to the society, its impact on the market, and apply economic theories to solve such a problem. In this, issue of the financial crisis has been identified as an economic problem. The background of the financial crisis has been explored, and major economic policy recommendations that aim at restoring financial stability have been identified.

 

Background of the financial crisis

An internationally-renowned economist and a Nobel laureate Milton Friedman said that policies may be judged not only by their intentions, but their outcomes. Indeed, the prevailing financial crisis would be termed as a product of well-intentioned but economically unsteady policies designed to amplify the rates of home ownership in America. Although a decisive action would be necessary at this time, it should be done in cognizance of the looming fiscal crisis caused by massive imbalance in the government spending as opposed to revenue. Failure to address the financial imbalance would be devastating to the nation’s economy both in the short and long-term. Therefore, the current administration is faced with the overwhelming task of adjusting economic posterity in the short-term while steering the nation towards long-term economic stability (Diamond, 2009, Pg. 3).

 

After the dot-com bubble burst the September 11 terrorist attacks, market dislocations and deflationary price spiral resulted to the Federal Reserve significantly reducing short-term interest rates. This catapulted the demand for mortgage refinancing heightened demand for home ownership. Between 2001 and 2006 increased borrowing ensued due to friendly financial policies. Such policies included home-equity loans, exotic mortgage loans, and cash-out refinancing, this was followed by skyrocketing of the 0% refinancing on the purchase of several consumer goods. Due to overspending, both household and business balance sheets deteriorated. In mid-2006, the world experienced a slowdown in the growth of housing prices, this reduction in housing values coupled with resetting of adjustable-rate loans made homeownership unaffordable (Ehler, 2009, Pg. 3, 4). Home foreclosures mounted, mortgage lenders recorded losses. The decline of the mortgage-lending enterprises resulted in massive losses among investment banks and the financial sector. This exacerbation of the financial crisis has had a myriad of negative impacts on society.

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