ECONOMIC CRISIS ANALYSIS (Essay Sample)

(Name) (Instructor's name) (Course) (Date) Economic Crisis Comparison The 2007 economic crisis was caused by the mortgage crisis (Acharya 2). The crisis was followed by the collapse of major financial institutions such as the Lehman Brothers. The government spent billions of dollars to bail out other key players in the financial sector. Excessive risk-taking by the banks that issued subprime mortgages was the key catalyst of the crisis (Acharya 3). Conversely, the 2020 economic downturn was caused by the outbreak of the Covid-19 pandemic. The outbreak was followed by lockdowns and restrictions instituted to combat the spread (Gopinath 4). These precautions and containment measures led to the shutdown of the global economy. The 2007 economic crisis mostly affected the global financial and housing markets and spread to the global economy. Some countries' economies were unaffected by the 2007 crisis. Some of them include China, India, Australia, Brazil, and Iran (Acharya 2). However, the effects of the 2020 economic downturn were felt globally since the pandemic led to the shutdown of the entire global economy (Gopinath 5). Unlike the 2007 economic crisis, no country was spared by the 2020 downturn. The tourism and the hospitality sector were severely affected by the 2020 economic crisis. The crisis also spread to other major sectors, such as retail, healthcare, and manufacturing (Gopinath 4). In the US, the 2007 financial crisis increased the unemployment rate to 10% as over 7.5 million people lost their jobs during the peak of the crisis (Acharya 3). Conversely, around 9.6 million jobs were lost due to the 2020 pandemic (Gopinath 5). The US unemployment rate rose to 8.05% compared to the previous year (Gopinath 5). A key similarity between the two crises was the federal government response through quantitative easing. In 2020, the US federal government responded by purchasing debt securities valued at around $700 billion (Gopinath 6). During 2007, the government also bought debt securities through the federal reserve from affected banks (Fullwiler and Randall 186). The debt securities comprised treasury bonds, bills, notes, consumer loans, and mortgage-backed securities (Fullwiler and Randall 186). Demand-side vs. supply-side fiscal policy The demand-side fiscal policies are mainly aimed at sustaining adequate aggregate demand. The aggregate demand comprises five key components namely: government expenditure, consumer expenditure, net export, and investment (Chugunov 43). Fiscal policies that affect either of these components also affect the aggregate demand. Demand-side fiscal policies include tax cuts and increased government spending (Chugunov 43). Conversely, the fiscal policies for the supply side focus on improving the business environment. Corporations benefit from these policies since they can employ more workers and, in turn, generate more demand. Some of the supply-side fiscal policies include deregulation and corporate tax cuts. These policies stimulate economic growth by offering inducements to companies to expand their operations (Chugunov 45). Policies employed during the 2007 and 2020 crisis During the 2007 economic crisis, the US federal government responded using fiscal and monetary policies (Karwowsk 22). As soon as the crisis hit, the federal government disbursed funds to bail out some key banks that were affected. Congress also approved a variety of fiscal stimuli package such as tax cuts, food stamp benefits, and unemployment insurance (Karwowsk 23). These fiscal stimuli were meant to restrict the spread of the crisis. Although the federal government's fiscal response had a positive impact, some policy slip-ups were noted that the federal government could have avoided (Karwowsk 24). One such error was the decision by the federal government to allow the collapse of the Lehman Brothers (Fullwiler and Randall 184). Economists consider the fall of the financial behemoth as one of the single events that caused severe damage to the financial market. Scholars liken this policy decision to the 1930 collapse of the Guardian Banks (Fullwiler and Randall 184). The fiscal stimulus offered to the banks also received widespread criticism. The intervention was viewed as the main cause of risk-taking behavior among these banks and increased public debt. Consequently, the federal government abandoned the fiscal intervention, slowing the economy's recovery. Scholars consider the decision to abandon the expansionary fiscal measures to be ill-advised and reckless (Karwowski 34). Some scholars argued that although the expansionary fiscal policies led to an increase in the public debt in the short run, the policies were crucial in aiding the economy's recovery during the recession since their negative effects were not long-term (Karwowski 34). During the 2020 crisis, the US government responded by rolling out a $5 trillion fiscal stimulus to aid the economy's recovery (Gopinath 2). The US fiscal spending was much larger than that of most advanced countries. Tax cuts and deferrals were also employed to mitigate the economic impact of the pandemic. Most countries, such as the US, also extended income support to households by offering cash benefits to the vulnerable population instead of tax cuts (Gopinath 34). These measures ensured that vulnerable households received support swiftly due to the severity of the hardship caused by the pandemic. The fiscal policies employed during the 2020 pandemic were viewed to be more effective in aiding the economy's recovery since their impact was felt by individual households that were struggling with widespread unemployment and inflation (Gopinath 35). The federal government also employed quantitative easing as a key monetary policy decision to aid the economy's recovery during the 2007 and 2020 economic crises. Quantitative easing was introduced to support the financial system by offloading the financial assets held by major banks (Fullwiler and Randall 184). Based on existing evidence, quantitative easing proved to be a crucial recovery tool during the 2007 crisis as it prevented the recession from worsening further (Gopinath 35). However, some studies suggest that quantitative easing had a short-term impact on the economy and was of little benefit to the l...