Short Term Responses To Debt Crisis


The American debt crisis led to significant slowdowns in the economic growth all over the world. The fourth quarter of 2008 saw an increase in the unemployment rate, touching 11 % highest rate since 1983. Real gross domestic product reduced at rate of approximately 6 percent annually. The average working hours per week were reduced to 33. The U.S. Federal Reserve and central banks around the world enacted some short term responses to debt crisis to avoid the risk of a deflationary spiral Read on to know more on the subject.

Several steps have been taken to increase money supplies as growing unemployment had led to a decline in global spending. To offset the reduction in private sector demand caused by the debt crisis, the governments have enacted large fiscal stimulus packages as debt crisis short term response. The U.S. implemented two stimulus packages, worth over nearly $1 trillion in 2008 and 2009.

The debt crisis brought the global financial system to the threshold of collapsing. The short term responses to American debt crisis of the U.S. Federal Reserve, the European Central Bank, and other central banks were instant and remarkable. These central banks bought US$2.5 trillion of government debt and distressed private assets from banks during the last quarter of 2008. In the world history, this was the largest liquidity injection into the credit market, and also the largest monetary policy action.

The European governments and USA also increased the funds of their national banking systems by $1.5 trillion, by buying newly issued preferred stock in their major banks. As short term responses to debt crisis, the governments also bailed out a variety of firms thus bearing large financial obligations. To date, different U.S. government agencies have obligated trillions of dollars in loans, asset purchases, guarantees, and direct spending.