Economic Article Analysis Essay Example | Topics and Well Written Essays - 500 words

Economic Article Analysis - Essay Example Banks, chastened by the recent credit disaster due to the subprime mortgage loan debacle, have refused to take more risks by way of lending. Seeing that the stimulus package did not work as expected, both Treasury and the Fed decided to inject funds directly -- from the helicopter, so to speak -- into the economy by buying distressed assets in order to pump more money into the economy to spur growth. This took the form of programs named Term Auction Lending Facility, Term Securities Lending Facility, and Asset Backed Paper Money Market Mutual Fund Lending Facility. This buyback program had recently reached $2.2 trillion from $950 billion last September 2008. Such an approach sought to stave off a "catastrophic downturn" although some observers think that the recession is already running, the worst since the early 1980s. From the economists point of view the attempt of the US government to intervene is based on what has been learned from the Great Depression of the 1930s when the so-called "invisible hand." was found no longer reliable. A British economist, John Maynard Keynes, proposed that the government should take direct action to stimulate the economy, by way of infusing liquidity through direct spending to stimulate consumption and industrial activity. The injection of cash could be made through the banking system, through low interest rates, or through fiscal policy via a budget deficit, or by a combination of both monetary and fiscal policy. First, the Fed offers low discount rate to the banks, and the latter should be able to to lend the money to borrowers at just a slightly higher interest to account for their income derived from the spreads In the present situation, however, the banks are not extending credit. Consequently, the Fed had to take direct action by purchasing distressed assets . When the economy recovers as widely believed it will, starting --