Between the current collapses of the credit and housing markets, and an aging population, the American economy is truly in crisis stage. Predictably, officials offering broad plans for fiscal and monetary policies to alleviate the crisis are numerous but there is yet any one governmental or private sector individual to step forth who has a direct and sustainable plan of action.
In line with the capacity for wavering in these troubled times, a few propositions for monetary and fiscal policies will be offered, however it is clear that there is no solution that can possibly be permanent. Generally speaking, the best approach for the Federal Reserve in the face of growing inflation caused by increased prices in materials and supply/demand imbalance is to remain conservative until sound fiscal policy can support an agreed solution.
While cutting taxes and offering short-term aid can be life-altering for some at this point of crisis, again, these are simply quick-fixes to a series of economic problems that may take the course of the next few years to sort out with any certainty.
One of the most pressing issues raised in the monetary policy report from July of 2008 is the increasing problem of a lack of credit being made available across sectors. Currently, individuals, businesses, and institutions are having a much harder time securing loans from banks and even federally-allied lending institutions.
This problem threatens the American economy, which is almost wholly reliant on consumer and business credit. The best way to address this issue of extreme (if not historic) macroeconomic importance is to take a two-tiered policy approach that combines elements of both fiscal and monetary policy. In terms of monetary policy, the Federal Reserve should cut interest rates to offer a much-needed rush into the economy, which presumably will allow credit markets to loosen up again.
While it is recognized that this is merely a short-term solution, in this current crisis, this is the only feasible option as the government has already allocated billions of dollars in bailouts that have yet to reach the credit markets enough to cause a significant change. While interest rate cuts will add to the current deficit, currently this problem seems miniscule when compared with the burden that the bailouts have added to such a deficit and for the short-term, this might be a way to enliven lenders enough, at least in some sectors, to help small businesses avoid closure. This is not a panacea, but as it is becoming clear, there does not seem one available in such an unprecedented crisis.
To compliment this further cut in current interest rates as part of a broader monetary policy, the fiscal policy approach on the part of Congress should include specific initiatives to increase tax cuts for those who are likely to be most affected by the lack of credit availability—small and medium-sized businesses who have their entire livelihood sunk in the availability of credit. While this will certainly cause a great deal of grumbling, small and mid-sized businesses do form an important core of our economy and as it stands, they are already paying quite a bit of their earnings in taxes, despite cuts aimed at helping them thrive.
This act of fiscal policy will be designated as a short-term and will last as long as credit markets remain frozen for the most part. If businesses are able to prove that a certain percentage of their business is being negatively affected due to a lack of availability of credit, such a business should have commensurate tax cuts until the crisis is less severe and prohibitive to business growth and development. It is recognized that both of these efforts will further deprive the federal government of much-needed funds, but this is necessary and seems, quite frankly, fair considering the billion-dollar bailout packages that have yet to produce any kind of observable effect. To account for these suggested changes, Americans will need to come to terms with the fact that we are entering a new era of monetary and fiscal policy and that once we emerge from crisis status, we will need to then address the essential need for more funds re-entering federal coffers.
On a related note, there is a great deal of volatility in the housing market, which has experienced a record slump in new and existing home sales and an associated mass drop in the average value of homes across the United States. On par with the credit crisis, this is another troubling situation that demands swift fiscal policy action. At this point, Congress needs to provide tax relief as well as smaller stimulus-check-like payments to homeowners who have lost 50% or more of their home value due to the economic downturn which has been in many ways caused by the collapse of the mortgage industry. While the issue of providing aid to those facing foreclosure due to either predatory lending and/or the acquisition of unrealistic mortgages when the housing bubble was at its height should be saved for another point in history, the best way to pump life back into the market is to provide a short-term replacement for the vast amounts of lost home equity many homeowners are experiencing. Since home equity and value also has a direct effect on credit markets, especially at the individual level, this would provide a small but much-needed boost. Again, this is also not a panacea that will even come close to solving the bind the American economy is in for the long haul. This suggestion to enact generous fiscal policies, part of which can be from monies allocated to the bailout packages since very little immediate effect from that is being felt anywhere currently, is short-term but can help homeowners who have taken on responsible mortgages that they do pay regularly and are able to pay.
Had this same assessment of macroeconomic issues been performed this time three years ago, the results and assumptions about tax cuts and granting aid and enacting other neoliberal reforms might have been questionable at best, but right now what seems most appropriate and critical is to help the majority of Americans keep their heads above water as it is getting more difficult to keep treading with each passing day.