Recess and government support

The economy all over the world is facing one of the biggest recessions in history. The US economy is among those that have been most affected by the recession. The Barack Obama administration has put in place various policies to support both the automobile and housing industries, which were on the verge of collapse. But Economists have different views about this government support. Some believe this support will help the economy, while others believe the support will not help the US economy. Recession can be defined as a business cycle contraction, a wide-ranging slowdown in economic activity over a period of time.

Recessions are widely believed to be a result of an extensive drop in spending. Governments respond to recessions by implementing expansionary macroeconomic policies such as increasing government spending, increasing money supply and decreasing taxation. The current recession in the US started towards the end of 2007 and is believed to have been partly sparked by the US housing market correction that resulted in the US housing bubble and the subprime mortgage crisis. The recession has caused a fall in private consumption for the first time in about 20 years, with the automotive and housing industries among those worst affected.

The automotive industry has recorded a sharp decline in sales and layoffs, with some firms gone into bankruptcy. This has affected both US-based and foreign car manufacturers. In September 2008, the Big Three automotive companies, General Motors, Ford and Chrysler asked for a $50 billion to pay for health care expenses and avoid bankruptcy and ensuing layoffs. They were given the first bailout under the Bush administration. In February 2009, the presidential Task Force on the Auto Industry was formed to deal with the financial bail out of automakers Chrysler and GM.

It reviewed the financial and operational restructuring plans submitted by both firms and made recommendations to the President regarding the restructurings and the requests for funds from the companies. The government had lent approximately $25 billion in total to the companies by May 2009, the time around which both firms went into bankruptcy. But by mid July, 2009, both companies had restructured and emerged from bankruptcy. (Wiley, 2009) To address the housing crisis, the Obama administration introduced a $275 billion plan with three components last year.

The first component was the Making Home Affordable Modification Program aimed at stabilizing the housing market and assist struggling homeowners get relief and avoid foreclosure. The second component was the Second Lien Modification Program, which offers homeowner means to modify their second mortgages to make them more affordable when their first mortgage is modified under the Home Affordable Modification Program. The third was the Home Affordable Refinance program that gives homeowners loans owned or guaranteed by Fannie Mae or Freddie Mac an opportunity to refinance into more affordable monthly payments.

Another plan is the Home Affordable Foreclosure Alternatives program that provides opportunities for homeowners who can no longer afford to stay in their home but want to avoid foreclosure to transition to more affordable housing through a short sale or deed-in-lieu of foreclosure. (Siegel, 2010). A number of top economists have supported the government support for the industries. Former Treasury Secretary Robert Rubin supports additional aid for the auto industry, which he describes as vital to the economy. Rubin says he openly welcomes any public policy put in place to allay the crisis.

Sean McAlinden, the chief economist at the Center for Automotive Research, Michigan, believes a bailout with no restrictions except that the cash be spent in the US is essential to help the auto firms endure the crisis. (Donna, 2009). Also supporting the bailout is David Wyss, chief economist at Standard & Poor's. Wyss says there could be an annual increase of about one million imported cars if GM and Chrysler fall. He says such a situation would take away about $25 billion from the US economy and reduce the GDP by 0.

2 percent annually. Matthew Shapiro, a professor of economics at the University of Michigan, supports government intervention and says it is important for the Obama administration to join hands and put in place any measures that would rejuvenate the auto industry. (Matt H. (2008). Phil Swagel, an economics professor at Georgetown University's McDonough School of Business, says White House policies on housing have worked. He acknowledges that the housing plan has helped move the economy in the right direction. (Dorning, 2010).

Another economist supporting the housing plan is Dan Greenhaus, the chief economic strategist for Miller Tabak + Co. , an institutional trading firm in New York. He says the plan has helped stabilize housing prices and lower mortgage rates. He says the few Republicans opposing the housing plan are doing it purely on political grounds. Martin Baily, a former chairman of the Council of Economic Advisers during the Clinton Administration, gives thumbs up for the housing bail out plan. He believes the Clinton economic team would have made similar decisions had they faced a similarly phenomenal crisis.

Christina Romer, chairman of the government’s Council of Economic Advisers, also supports the Obama housing plan for its focus on results, and lauds the president for his pragmatism of what's right for the economy. She says the housing policy was right at the time it was adopted. (Dorning, 2010). Nonetheless, there has been extensive opposition for the bailout of both the automotive and housing sectors. Economist Thomas Sowell opposes the government bailout for the automotive industry. He says the general standard of living is higher when success and failure are determined by clients rather than by politicians.

Alex Tabarrok, associate professor of economics at George Mason University, also disapproves the auto bailout. He terms it unwise for the government to select which industries receive subsidies and which do not. Prof. Tabarrok notes that the auto industry is not a crucial one. (Matt H. (2008). Joseph Stiglitz, a Nobel Prize-winning economist, is deeply critical of the support for the housing industry, especially the $75 billion mortgage relief program. He says the program does little to Americans who cannot afford to make monthly payments.

Stiglitz adds that it also neither helps to neither reduce principal nor make changes in bankruptcy law that would help people work out debts. He believes the relief program does not also change the incentive to simply stop making payments once a mortgage is greater than the value of a house. (McKee & Benjamin, 2009). Mark Zandi, chief economist at Pennsylvania’s . Moody’s Economy. com says believes the short-term application of the policy could hurt the economy. He says the housing market is still on life support and warns that plans to withdraw government measures too quickly will sink the market, which will take the economy down with it.

He says households have very high debts loads and notes that in addition to the mortgages, any reduction in income could almost automatically trigger a foreclosure. (Gaystolberg and Andrews, 2009). Economist and Nobel Peace laureate Gary Becker terms the government’s plan to build new homes with unemployed labor as an unwise policy, He says under such a move, the stimulus to GDP might be close to, even larger than, the amount spent, especially give n the current housing glut. He shares his opinion with Kevin Murphy, a professor of economics at the University Of Chicago Booth School Of Business (Becker and Murphy, 2010).

Economist Rick Moran openly expresses his opposition for the housing plan, which he notes has failed. He terms the policy for homeowners as wrong headed and misguided, saying they have worsened the situation and delayed the recovery in home values by artificially propping up mortgage holders who can't pay. (Moran, 2010). Another economist who opposes the housing plan for its perceived alienation of some borrowers is John Courson, the chief executive of the Mortgage Bankers Association.

He says the plan seems to offer little help to borrowers whose loan exceeds their property value by more than five percent. (The BBC, 2009). Brian Bethune, the chief financial economist at IHS Global Insight in Lexington, Massachusetts, predicts that the housing sector housing is going to have a bumpy ride this year because of foreclosures, with or without the housing plan. He urges the government to look at principal reductions since there was a high chance that the measures in HAMP were not feasible. (Howley, 2010).

References

  • Becker, G. and Murphy, K. (2009). The Wall Street Journal. There's No Stimulus Free Lunch.
  • Kiviat, B, (2009). Time: Will Obama’s New Housing Plan Work?.
  • Dorning, M. (2010): Obamanomics Working. Bloomberg Businessweek.
  • Gaystolberg, S. and Andrews, E. (2009) New York Times; $275 Billion Plan Seeks to Address Housing Crisis:
  • McKee, M. and Benjamin, M. (2009). Bloomberg.Com. Stiglitz: Ties to Wall Street Doom Bank Rescue: http://preview.bloomberg.com/apps/news?pid=newsarchive_en10&sid=afYsmJyngAXQ  Retrieved; May 18, 2010.