2008 Economic Stimulus Act & 2009 ARRA Research Paper Starter

2008 Economic Stimulus Act & 2009 ARRA

(Research Starters)

The recession that began in 2008 was largely born of the policies and programs that helped bring the 2001-2004 recession to a close. In a way, it was caused in part by consumers, many of whom were convinced by unscrupulous lenders that they would be able to make tremendous investments in the real estate market. The overwhelming number of homeowners whose debt eventually overcame them sent shockwaves through the financial system and eventually helped slow down the economy to a degree not seen since the Great Depression of the 1930's. At the earliest stages of the recession, an economic stimulus package was offered by Congress to prevent a worsening of the country's fiscal condition. At the tail end of the recession, another recovery package was offered to prevent a return to fiscal instability. This paper will review these two actions — the Economic Stimulus Act of 2008 and the American Reinvestment and Recovery Act of 2009 — and their effectiveness in addressing the recession of 2008-2010.

Keywords: American Reinvestment and Recovery Act (ARRA); Depression; Economic Stimulus; Housing Bubble; Subprime Mortgages; Tax Incentives; Troubled Assets Relief Program (TARP)


One of the most maligned figures of the Great Depression was President Herbert Hoover. He is blamed for both not acting during the crisis and managing a government intervention that was terribly misguided. However the public may have felt about Hoover either during his administration or in the years that followed, his perspective on the critical importance of industry and the consumer was well-founded. "Economic depression cannot be cured by legislative action or executive pronouncement," he once said, "Economic wounds must be healed by the action of the cells of the economic body — the producers and the consumers themselves" (www.brainyquote.com).

Indeed, efforts to revitalize the economy during the Great Depression and during subsequent recessions have focused on reinvigorating the supply side and encouraging consumers to return to active spending and investing. This trend continued through the beginning of the 21st century, in which the United States experienced two recessions in its first decade. For example, the government's response to the 2001-2004 period, which was punctuated by the horrific terrorist attacks on September 11, 2001, was slowed by the lowering of key interest points and providing tax credits for business.

The recession that began in 2008 stemmed in part from the policies and programs that helped bring the 2001-2004 recession to a close. The overwhelming number of homeowners whose debt eventually overcame them through subprime and even fraudulent lending sent shockwaves through the financial system and eventually helped slow the economy to levels nearly like the Great Depression. This paper will review the two actions employed by the government to end the crisis: the Economic Stimulus Act of 2008 and the American Reinvestment and Recovery Act of 2009.

The Causes of the 2008 Recession

On the tail end of the 2001-2004 recession and a period of economic stagnation, the Federal Reserve (also known as "the Fed") recommended that interest rates stay as low as possible. The rationale was simple — lower interest rates attract investment in housing, business loans and other areas of economic growth. The move worked, as more and more potential homeowners entered the market, spurred by the perception that they could indeed afford to pay monthly mortgage rates. However, starting in 2004, the price of oil started to rise, and the Fed responded by gradually increasing interest rates (Beese, 2008).

The change in interest rates came as a shock to the growing number of homeowners. They had already emerged from the 2001 recession mired in debt — a significant number of homeowners took out home equity loans or otherwise used the equity built into their properties to bolster their income during that crisis. In the six years between 2001 and 2007, about $5 trillion was taken out of homes to compensate for the sluggish economy, accounting for about 30 percent of the total growth in American consumption during that period (Henwood, 2008). A large percentage of these homeowners were committed to subprime loans — loans that were offered to people with poor credit — which were growing in popularity due to aggressive marketing by lenders and endorsements by the federal government (Holt, 2008).

Adding to the "housing bubble" (an uncorrelated increase in the price of residential real estate) that was expanding by 2007 was the fact that financial institutions did little to curb subprime lending. In fact, this practice became one of the most prolific of lending practices, with major institutions purchasing or developing subprime lending companies to tap into this increasingly popular type of mortgage. Major financial institutions such as Citigroup, Merrill Lynch and AIG, as well as their subprime subsidiaries, were concerned with loan quantity rather than quality (Burry, 2010). In fact, many saw little reason for concern about the risks of lending to people with low credit, since the innumerable quantity of subprime mortgages could be securitized on the market and backed by the federal government.

By 2007, the housing bubble began to collapse upon itself, creating a devastating confluence of issues. As home prices began to retract, homeowners found themselves with less equity in their homes than they were paying in mortgages. A great many simply could not afford to make their monthly payments, sending their mortgages into foreclosure. The sudden toxicity of subprime mortgages meant that banks would lose millions — many institutions that had placed such loans on the market in speculative trades were now faced with a widespread volume of losses, and they did not set aside enough money to cover those losses (Appelbaum & Cho, 2010). These factors helped create one of the longest recessions in U.S. history since the Great Depression, as homeowners lost their homes in great numbers and once-powerful financial institutions teetered on the brink of collapse.

The housing bubble and the near-collapse of the financial industry created an environment of poor economic health. Lenders were unable to provide credit to businesses, which in turn were forced to lay off workers. The high volume of personal debt and lack of jobs created sizable shortfalls in tax revenues for state governments, causing them to slash budgets. Meanwhile, international markets were impacted by the financial industry's woes; the U.S. recession had become a global recession. The recession was so widespread and impactful that few political leaders, media outlets or casual observers could resist comparing the 2007-2008 recession (and the period of sluggishness that followed) to the Great Depression.

As the recession took hold, the administration of President George W. Bush sought to reverse the malaise by infusing consumers with tax rebates and lower interest rates. After the recession came to an official end, however, growth continued at a minimal pace into the term of President Barack Obama, who offered another set of federal intervention policies.


The Economic Stimulus Act of 2008

Consumer Rebates

President George W. Bush's first response to the economic crisis focused on infusing money into the consumer base. Nearly 80 percent ($120 billion) of the $152 billion package would be spent on tax rebates for consumers. Most individual taxpayers would receive $600, while married couples filing jointly would receive $1,200. Individuals with incomes of $75,000 and jointly filing couples earning $150,000 would not qualify for these rebates ("Bush signs," 2008). Rather, the stimulus rate reduces by five percent of the amount of income that exceeded the $75,000/$150,000 mark. Additionally, parents with children under 17 years of age and who qualified for the federal Child Tax Credit would receive an additional $300 per child under that credit.

The Economic Stimulus Act quickly moved through Congress in a mere four weeks. The speed of the bill's passage was indicative of the bipartisan desire for the government to quickly halt a recession before it took full root. The Senate took two weeks deliberating the bill before adopting it on February 7, 2008 by an overwhelming vote of 81 to 16. Later that day, the House took the matter up and, by another impressive vote differential of 380 to 34,...

(The entire section is 3736 words.)