Financial Crisis 2008-2010
RESPONSE BY US AND CHINA TO THE ECONOMIC SHOCKS CAUSED BY THE GLOBAL FINANCIAL CRISIS, (2006-2008).
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Chapter 1
INTRODUCTION
Starting in 2007 and continuing for years, the Great Recession had a ripple effect on economies all around the world. It's been called the worst economic downturn since the 1930s. The Great Recession refers to the worldwide economic downturn that began in December 2007 and officially ended in June 2009 (Laevan & Igan, 2010). As the U.S. housing market crashed, the value of a lot of mortgage-backed securities (MBS) and derivatives fell precipitously, and the economic downturn began, (Fairlie, 2013, pp 207-231). The procedure of dealing with the crisis by states across the world manifested in four primary phases. These included intervention which aimed at containing the economic epidemic, and restoration of the confidence of the people in the system. It demanded extraordinary steps by the government. Following intervention came the coping stage and dealing with the indirect impacts of the financial downturn. After the coping stage, followed implementing changes in the financial system to help avoid similar occurrences. This was achieved my making changes in the financial systems that would diminish risks and future downturns.
Causes of the Financial Crisis
The crisis that gripped the entire global economy was a result of several factors. These included the following:
1.?????Asset price bubble
2.?????Booming credits
3.?????Marginal loans and systemic risks
Asset Price Bubble
???????????During the early 2000s, housing prices in the US increased by 30 percent from 2002-2007 causing financial turmoil in the banking systems (Laevan & Igan, 2010).
Booming Credits
The credit boom concentrated in the mortgage sector led to rapid credit growth which did not coincide with continual fluctuations (Berlatsky, 2010). This caused the real output, investment, and consumption to rise above the regular trend in the build-up phase but fell drastically low during the unwind phase (Laevan & Igan, 2010).
Marginal Loans and Systemic Risk
The booming housing market led to the creation of marginal assets which relied on the macroeconomic environment. A large chunk of mortgage expansion, in the US, comprised loans that extended to borrowers that had limited credit, and poor employment background, leading to multiple defaults (Berlatsky, 2010).
Research Questions
The primary aim of the research is to understand the different responses of the world’s major economies during the financial crisis of 2008-2010. However, the study also aims to answer the following questions:
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Chapter 2
BACKGROUND AND HISTORY
An economic crisis usually occurs when the economy of a state experiences a sudden, unexpected downfall in its Gross Domestic Product, or in the country’s combined output (Liberto, 2023). As a result, there is a visible, striking decline in the real income per capita. There is also an increase in poverty, with a ballooning unemployment rate. When the economic crisis leaves a devastating impact on the country, it is referred to as a depression (Liberto, 2023). On the other hand, when the crisis is serious but is not as devastating it is called a recession. Both recession and depression are similar in the sense that both comprise economic downfalls, high unemployment rates, and burgeoning poverty (Masciandaro et al., 2011). But unlike a recession, depression lasts longer, hence leaving a far dire impact on the suffering economy.
The term "Great Recession" is a pun on the "Great Depression," which occurred in the 1930s and was characterized by a drop of more than 10% in GDP and a rise of unemployment to 25%. Although there are no hard and fast rules to tell a severe recession from a depression, most economists agree that the downturn of 2007-2009 did not qualify as a depression. During the height of the Great Recession, unemployment in the United States briefly hit 10% and GDP fell by 0.3% in 2008 and 2.8% in 2009, (Wimer, 2011).
Mortgage-backed securities and sophisticated derivative instruments were sold at record levels by financial institutions during the U.S. housing boom. These securities saw a sharp decrease in value during the real estate market crash of 2007 (Birol, 2020). Once house prices began to fall in 2007 due to the growing economic crisis, the credit markets that had financed the housing bubble followed suit. The collapse of Bear Stearns in March 2008 marked a tipping point for the solvency of over-leveraged banks and financial organizations (Masciandaro et al., 2011).
The collapse of the DotCom boom in 2001 and the September 11th attacks on the World Trade Center severely damaged the American economy. In order to stimulate the economy, the Federal Reserve of the United States slashed interest rates to their lowest levels since Bretton Woods. The Federal Reserve kept interest rates at historically low levels into the middle of 2004, (Danziger, 2013, pp 123-164)
Low-interest rates, in conjunction with government initiatives to increase homeownership, stoked a boom in real estate and the banking sector, leading to a huge increase in overall mortgage debt (Naughto, 2009). Many people who wouldn't have qualified for mortgages before were able to get them because of creative financing options like subprime and adjustable mortgages that were underwritten with the assumption that interest rates would remain low and home prices would continue to climb.?
But the Federal Reserve hiked interest rates from 2004-2006 to curb inflation. New credit entering the real estate market through standard banking channels slowed as interest rates rose. Worse, many customers had their rates on existing variable mortgages and exotic loans reset to significantly larger amounts than they had anticipated. Many borrowers started selling their homes because the increased monthly mortgage payments were too much for them to handle (and they couldn't refinance because home values had leveled off) (Cecchetti, 2008). As a result of the supply rise, the housing bubble eventually popped.
Mortgage-backed securities and sophisticated derivative instruments were sold at record levels by financial institutions during the U.S. housing boom. These securities saw a sharp decrease in value during the real estate market crash of 2007. When the housing market crashed in 2007, the credit markets that had financed the bubble collapsed as well. The collapse of Bear Stearns in March 2008 marked a turning point for the solvency of over-leveraged banks and financial organizations, (Nayyar, 2011, pp 20-32).
The situation reached a peak in September 2008, when Lehman Brothers, the fourth largest investment bank in the country, filed for bankruptcy. The European economy wasn't the only one hit hard by the pandemic (Birol, 2020). The Great Recession was responsible for the loss of 8.7 million jobs in the United States and a doubling of the unemployment rate, as reported by the Bureau of Labor Statistics (Kincaid, 2010). In addition, the stock market crash caused a loss of nearly $19 trillion in wealth for American families, as reported by the Treasury Department. In June of 2009, the Great Recession was officially declared over, (Gilchrist, 2018, pp?32(3), 3-30).
The economic crisis of 2006 to 2008, also referred to as the Global Financial Crisis significantly affected the United States and China’s economy. Each state practices a different kind of political and economic system (Martinelli, 2009). While the US boasts of being a Capitalist, Liberal state, China is a mixed Socialist Market economy. China’s response, as per researchers was molded by its eagerness and desire for maintaining stability and avoiding the global recession. China also wanted to promote its interests on the global platform (Wade, 2009). It has been argued that China was successful at large in responding to the crisis as it managed to maintain economic prosperity and improve the influence it has in the global political system.?
The Aftermath Of The Recession
?The United States and China were among the countries hardest hit by the global financial crisis that unfolded between 2006 and 2008. Numerous individuals and families saw their standard of living fall as a direct result of the crisis, which had serious economic and social repercussions. Despite the magnitude of the disaster, the US and Chinese governments responded very differently, with each country taking its approach to dealing with the aftermath (Cecchetti, 2008).
Figure 1
During an economic recession, every group of people is affected, but with different intensities depending on their circumstances (Masciandaro et al., 2011). The effects vary across generations, socio-economic groups, and geographical regions. The impact of the global financial recession affects the employment rate, the health sector, and poverty. The following table shows that China witnessed an exponential growth in GDP in 2007, but the financial crisis caused a downfall in the GDP growth. The table also compares side by side the US and China’s GDP through the years especially in 2008 and 2009. It shows that the US GDP output was drastically low as compared to China.
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Chapter 3
THE US AND THE ECONOMIC RECESSION
The economic recession began in the US and then spread like wildfire across the entire globe. It affected peoples’ livelihoods, and increased unemployment, and poverty in the States. The United States was sharply hit by the Great Recession from 2007 to 2009, with some other economies feeling its effects for even longer. The primary cause was banks providing mortgages to borrowers who did not ordinarily qualify for them, thereby exposing them to unacceptably high levels of risk. Because the loans could be packaged into an instrument and then sold, the lenders were ready to bear the risk. The problem was exacerbated by the availability of cheap credit and the fact that banking institutions were no longer constrained in their ability to engage in the commercial and investment banking activities that the Glass-Steagall Act had previously separated, (Islam, 2010).
???????????The American Recovery and Reinvestment Act, totaling $787 billion, was part of the government's enormous rescue package when the economy collapsed and financial institutions faltered (Kincaid, 2010). While most people agree that the bailouts and ARRA were necessary to prevent a complete collapse of the economy and the financial sector in particular, some critics have pointed out that the funds used to rescue failing institutions could have been put to better use elsewhere.
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Increase in Unemployment Rate
The United States of America has always been seen as the country where dreams come true. However, during the financial recession, there was a striking increase in unemployment in the country. The rate of unemployment increased from 4.7 percent to a staggering 10 percent
Figure 2
in 2007.2009 (Masciandaro et al., 2011).?As one can see in the Figure 2 below, during the financial crisis, the rate of unemployment rose dramatically from 4.5 percent to a staggering 10 percent by the end of 2010, and it started to gradually decline after the year 2010.
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Low Gross Domestic Product (GDP)
Figure 3(Birol 2020)
The GDP also witnessed a decline in the US during the recession. In the last quarter of 2008, the real GDP fell at an annual rate of 8.5 percent (Kincaid, 2010). This was declared the largest decline in GDP since 1982. Till 2000, the decline further decreased by 4.3 percent, before it began to recover in 2011, as evident in Figure 3 (Birol, 2020). The figure also depicts the outcomes of the stimulus measures and how it helped GDP grow exponentially in the last quarter of 2009. This was made possible by AARA (The American Recovery and Reinvestment Act). The AARA or Obama Stimulus comprised massive federal spending which aimed at creating new jobs, and retaining old ones during the Great Recession of 2008. The government spending helped to compensate the dragging, or slow output of the private sector.Low Inflation Rate
Inflation is referred to as the rate at which the prices of goods, and services increase. During the financial crisis, inflation is inevitable. It depends on the purchasing power of the people. However, since the unemployment rate declined, the demand for products and goods also reduced. Inflation in the United States fell from 4.1 percent (2007) to 0.1 percent in 2009.?
Fiscal Policies For Managing The Recession
The economic recession of 2008-2010 came with strong economic repercussions for the United States. The recession resulted from the collapse of the housing market in the US, which was experiencing a bubble since the start of the 2000s. The gradual downfall of huge financial institutions including Investment Bank Lehman Brothers. The ripple effect soon caused the downfall of the non-financial economy. The US implemented several policies that helped it recover from the recession.
Economic Stimulus Package
As a response to the recession, the US government passed the American Recovery and Reinvestment Act (ARRA) in 2009 (Birol, 2020). The package worth USD 787 billion comprised a wide range of measures which included direct payments to people, large tax breaks for businesses, and enhanced funding for unemployment benefits (Kincaid, 2010). The ESA of 2008 was signed into law on 13th February, 2008. It authorized distributing the stimulus payments that comprised basic payments, and supplemental payment. The basic payment was USD 300 for individuals, while USD 600 for couples, with a taxpayer’s tax liability of USD 600 for individuals, and double for couples filing together (Scott, 2018).
Households with no tax liability were given basic payments of USD 300 and USD 600
for couples, The ESP was also reduced by 5 percent of the amount by which adjusted gross
income (AGI) exceeded a threshold of $75,000 of for individuals and $150,000 for couples.
Federal Reserve Intervention
Figure 4 (Grunwald, 2014)
The central bank of the US, The Federal Reserve, decreased the interest to the lowest possible levels to stimulate economic growth in the country and promote borrowing and lending (Birol, 2020). The Federal Reserve also bought government bonds to improve the liquidity of the financial sector.?The following Figure 4 shows the outcome of AARA and how it helped the recovery of GDP. The graph shows that AARA increased about 0.5 recovery rate of GDP in the fiscal year 2009. However, as the recovery reached its peak, the GDP output reached an apex of 2.5 percent in the second quarter of 2010, and eventually became stable in the last quarter of the same year at 2.0 percent (Grunwald, 2014). Dodd-Frank Wall Street Reform and Consumer Protection Act 2010
Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2009 aimed at increasing the regulation of the financial sector (Birol, 2020). The act also focused on improving the oversight of banks and protecting consumers from malpractices of lending money. As a result of the Dodd-Frank Reform, the banking sectors were required to keep more stable funding base. They were also required to have enough liquid assets that would help them survive elaborate and long periods of stress. Erstwhile, banks traded by exploiting their capital. However, as a security measure, the banks were forbidden from such trading activities. Now, they are required to focus on facilitating their clientele and the latter’s trades. Resultantly, the capital the banks hold now against trading positions increased by almost 50 percent in the next 5 years (Scott, 2018).
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Auto Industry Bailout Plan
The government of the US also provided strong support to the struggling industry of automobile in 2008-2009. The government provided loans and investments to Chrysler and GM (Birol, 2020). The US also focused on promoting local goods and decreased reliance on imported goods.?
Reports have suggested that the US’s response to the global economic crisis was defined by a combination of monetary and fiscal policies while reforming the financial sector (Martinelli, 2009). Studies have found that US’ response left a strong impact on China and improved the potential for trade between both states (Kincaid, 2010).?
In both countries, the state responses were essential in managing the Global Financial Crisis. The Republic of China put major responsibility on the shoulders of the state, especially regarding the implementation of stimulus measures and regulating the financial sector. On the other hand, the United States responded with a limited role for the central government. It focused primarily on market-based solutions (Kincaid, 2010).?
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Chapter 4
CHINA AND THE ECONOMIC RECESSION
Impact of the Recession on China
Amid the global financial crisis, China’s economic output came down to 8 percent in 2008 from 13 percent in 2007 due to the low demand for Chinese exports in the world (Yu, 2010). China unveiled the largest stimulus package in history in late 2008. China's economy also bounced back from the recession faster than any other major economy. After a brief but severe recession in 2008, China's economy rebounded in 2009, expanding by 8.7 percent, and again by 10.4 percent in 2010. By the middle of 2009, a number of Chinese policymakers and analysts had expressed concern over the sustainability of the stimulus program's results, (Trabandt, 2015, pp 110-167)
Land and housing prices, for instance, soared due to an asset bubble fueled by the significant increase in easy credit, more than tripling in several major cities in 2009. Concerns regarding the sustainability of local government debt were exacerbated by the rapid rate of municipal investment. Early in 2010, the government became frightened enough to ask for an emergency freeze and audit of local government investment organizations, and by the end of the year, slowing growth and tamping down inflationary pressures had become the key problem for macro-management.
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Increased Rate of Unemployment
Figure 5 (Broda & Parker, 2014)
As a result of the Great financial crisis, China witnessed an increase in unemployment, but the figures were not as staggering as that of the US. The Chinese government’s stimulus measures help support the employment rate and boosted domestic demand. The unemployment rate in 2008 in China was 4.8 percent, while in 2010 it came down to 4.3 percent (Naughto, 2009).Decline in Gross Domestic Product
The Global Recession significantly impacted China’s GDP. The country’s export-oriented economy witnessed a decline in 2007 from 13 percent to 9 percent in 2009. Figure 2 shows the downfall of China’s exports and imports during the recession, causing a low GDP output. It can be seen that China’s exports and imports fell below the graph, implying the exports and imports were both in a massive decline. The money aggregates (M10, M12 etc.) in each quarter of the year from 2008 to early 2009 was quite low making the country’s GDP extremely low.
Rise in Poverty Rate
During the crisis of 2008-2010, poverty rates in China remained relatively stable. According to the report, the poverty rate in the country decreased from 10 percent to 8.5 percent and 8.1 percent in 2008, 2009, and 2010, respectively (Naughto, 2009). One of the contributing factors to the stability of the poverty rates in China was the large-scale stimulus measures initiated by the government which helped to boost local employment. The government increased public spending and invested heavily in the reconstruction of infrastructure (Cecchetti, 2008).
Decline in Inflation Rate
Inflation in China, like the US reduced during the recession. The reduced demand, coupled with lower commodity prices pushed the inflation from 8.7 percent in 2008 to 0.6 percent in 2009 (Kincaid, 2010).?
China’s Efforts in Combating the Crisis
China was the world’s first major economy that managed to emerge out of the global financial crisis spectacularly. The sharp downfall in 2008 did not lead the country to become bankrupt, and economically disabled. In fact, in 2009, the country’s economy grew by 8.7 percent. The next year, in 2010, it had grown by 10.4 percent ( Naughto, 2009). The mass stimulus program became the defining factor of how China emerged from the recession.?
The initial program had a funding of 4 trillion CNY amounting to USD 587 billion, about 12.5 percent of the country’s GDP. It was planned to be spent in 27 months. The package was three times larger than the stimulus package introduced by the US, making it the biggest package in the world.?
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The Stimulus Package
The stimulus package consisted of four components:
Investment Program
The program was announced by PM Wen Jiabao at the end of 2008 consisting of CNY 4 trillion. The amount was to be spent over 27 months on 7 priority areas (Gov.Au, 2012):
Transport (including railroads, airports, and electricity grids).
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Monetary Policies
The monetary policy was implemented to slow down the country’s growth. The policymakers decided to implement flexible monetary policies. In September 2008, the central bank reduced the lending rate from 7.5 percent to 5.6 percent. In the next three months, the interest rates were cut 5 times (Wong, 2011). By November 26, 2008, the cut was 108 basis points (Wade, 2009). To further accommodate the financial sector (Yu, 2010).
The government released a plan comprising 9 steps which consisted of new credit mechanisms for businesses of various sizes. It also released new regulations for creating Private Equity (PE) and Real Estate Investment Trust Funds (REITs). By the end of 2008, the government had also allocated an additional CNY 100 billion (Yu, 2010).
Tax Cuts
The government also cut taxes to accelerate the rollout of planned reforms, which included Value Added Tax (VAT) rebates on exports, and cutting the tax rate from 6 percent to 3 percent for small enterprises. The tax levy on monthly income was also increased to 10,000 from CNY 5,000 (Wong, 2011).
Measures for State-Owned Businesses
State Owned Enterprises (SOEs) consist of businesses owned and run by the government. The government provided subsidies to financially weak firms. The responsibility was carried out and managed by the Assets Supervision and Administration Commission (SASAC) (Wong, 2011). The SASAC also released funds to two Chinese airlines (Yu, 2010).?
Implementation of the Program
The program started implementing its policies by the end of 2008 with a strong sense of urgency (Yu, 2010). At a time when massive infrastructure projects were being delayed or cut off altogether, the government of China planned to spent an astounding USD 586 billion into projects related to infrastructure. The USD 586 billion constituted about 7 percent of the country’s entire GDP (Barboza, 2008). Over the next two years, the government would use this money to set up new railway lines, construct subways, and develop high quality airports. The money was also pushed to rebuild communities that were left devastated by an earthquake that occurred in May of 2008 in the south-western part of China (Barboza, 2008).
The following figure 3 shows the estimate of the stimulus efforts and its size during the years 2008-2010. To explain the net effect of the relief program, the table makes a distinction between ordinary growth and extraordinary growth. Average credit growth was estimated at about CNY 3.93 trillion, 4.55 trillion for the years 2008-2010, with a growth of 15 percent per annum from 2003-2007. The figure also depicts that a rough estimate of stimulus would be CNY 9.5 trillion over a period of 2 months, making it 27 percent of the total GDP.
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Figure 3, (Kambhampati, 2020)
Chapter 5
Research Methodology
The research methodology for the research paper is going to be qualitative. Qualitative data allows for a detailed understanding of the phenomenon under observation. The research methodology is flexible and spontaneous as qualitative research lets the researcher explore in depth of the topic at hand. The research was conducted by assessing various journals, magazines, and news articles. The data collected from journals and news articles will be assessed using an interpretative analysis. It will be applied to texts gathered through studying various journals, articles, and?books. Hence, the results would be based on interpretivist approach that allows for a sound analysis of qualitative data.
Objectives of the Research
The purpose of any research is to develop an understanding of the phenomenon being researched and discover any answers to questions related to the problem statement. Research is not done arbitrarily. It consists of scientific procedures which allow the researcher to answer the problem statement objectively, and without any researcher’s bias.?
1.?????To achieve new insights and familiarity with the problem statement
2.?????Accurately portraying the various characteristics of USA and China
3.?????Evaluation of different approaches taken by each state
To Achieve New Insights and Familiarity with the Problem Statement
One of the objectives of this research is to understand the economies and policies of China and the US- the two biggest economies of the world, and how they navigate through difficult times.?
Accurately Portraying the Characteristics of the US and China
China and the US practice different economic systems. The former is a semi-closed economy, while the latter proudly follows a liberal economic system. By portraying the characteristics of the US and China the study can serve as an example for developing states to know how to maneuver their country through recessions and tough times while not compromising on economic growth.
Evaluation of the Different Approaches Taken by Each State
The study also aims to identify and analyze the different approaches and policies implemented by the United States and China during the Global Financial Recession of 2008-2010. It will also assess the outcomes of the policies and identify the various factor that contributed to the effectiveness of each country’s policy.?
The research objectives are to compare and contrast the monetary and financial policies that were carried out by The United States and China during the Global Recession of 2008. It also aims to examine how the economic downfall impacted the economies of China and the United States of America. It will also shed light on the social welfare in both major economies focusing on income disparity, poverty, and education.
To learn from the experiences of the United States and China during the recent financial crisis, the researcher will assess and contrast their respective responses, focusing on the policy measures taken, the efficacy of those actions, and the larger economic and social repercussions. Based on the research results, it intends to provide suggestions to officials in the United States and China on how to handle and recover from a financial crisis. The study will also have strong implications for economists and policy-makers in the international community, especially the US and China. Identification of the various factors which contributed to the differences in the states’ policy responses to the financial crisis can help gain better insights into the strengths and weaknesses between policies and the approaches implemented by each state.
Limitations of the Study
Every study comes with its own set of limitations. Limitations are part and parcel of life, and this research was no different. A few limitations that the researcher faced are as follows:
Time limitation
The study has a few limitations that include the limitation of time. Time constraints limit the researcher’s ability to expound on the problem statement and assess it in detail. Since the study was qualitative, it was time-consuming to assess and analyze the collected data.
Limited Access to Data
Similarly, the limited access to data on the global financial crisis. Since the economic crisis occurred not long ago, and it affected every nook and corner of the world, the data focusing on the US and China was not comprehensive.?
Funding for the Research
Funding for the research was another study. Many of the journals available online were not free and had to be bought. Similarly, the majority of the data assessed for the project was not available in the libraries and the researcher had to spend a hefty amount of money to purchase those books.?
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Chapter 6`
COMPARISON OF US AND CHINA’S STRATEGIES DURING THE RECESSION OF 2008-2010
Understanding the US and Chinese responses to the financial crisis of 2006-2008 is vital for policymakers and researchers alike given the centrality of these economies to the global financial system. The goal of this study is to analyze how the United States and China handled the crisis and what effects their actions had on the economy and society. This study attempts to shed light on the efficacy of various policy approaches to managing and recovering from a financial crisis by comparing and contrasting the responses of the United States and China to the crisis. The research is therefore going to focus on the following problem statement: “Response by US and China to the economic shocks caused by the global financial crisis.”
Different Economic Systems of Both Countries
The US and China are among the world's strongest economies. However, both countries follow different political and economic systems. Apart from the differences in their cultures, and histories, the political system of each country is inspired by their leadership and how they viewed their country to be like in the future (Martinelli, 2009). China’s one-party system, with President Xi Jinping serving more than two decades as the elected president helped the once weak and downtrodden country to become a strong force on the international platform. On the other hand, the US has enjoyed its position of being the world leader for over 100 years (Laevan & Igan, 2010). However, none of the countries was safe from the Global Economic Crisis of 2008-2010 that was caused by the collapse of the home real estate market in the United States of America ( Naughto, 2009).
The research found the difference in their responses largely loom from the different economic and political system of each country. The US follows a market based economic system which lay great stress on private ownership and enterprises, therefore, releasing stimulus measures that would help boom the private sector especially, banking system. America’s major goal was the resurgence of a healthy competition between businesses and bring back the economic growth of the country (Berlatsky, 2010).
On the other hand, China’s economy is controlled and led by the state which puts high emphasis on the government which has the authority to plan and control the market however they want. This factor gave China an advantage during the economic crisis of 2008 as it provided the government the authority to implement massive stimulus measures which not only boosted the demand but also helped to stabilize the economy (Cecchetti, 2008).
Priorities of the US Government and The Government of China
Furthermore, the policy priorities of each country were polar. The United States of America’s emphasis was the stabilization of the financial sector that would eventually prevent the banking system from collapsing (Wade, 2009). On the other hand, China’s primary goal was avoiding the global recession, while promoting the country’s interests at the international platform. Much like the US, China also wanted to maintain a stable economic system. However, the different goals contributed to the change in policy development and implementation (Wong, 2011).
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Institutional Sectors and Impact on Response to the Economic Recession
Another factor that might have played a role in the differences in each country’s response might be the institutional structures. In the early years of the 21st century, China’s economy was isolated (Wong, 2011). The government had insulated China from the international financial market. It also practiced a significant control over the private sector making it easy for the government to alleviate the aftermath of the financial crisis (Naughto, 2009). However, it is obvious that the US, the flagbearer of a free market economy, has a financial system that is extremely integrated with the global markets. The private sector has a higher degree of control which makes it quite difficult for the government to implement control in the market
Both the US and China are among the strongest economies in the world. But both follow a different politico-economic system. While the US is the harbinger of a free market economy that allows for private entities to grow exponentially without government interventions. The Republic of China follows a mixed politico-economic system that consists of socialism and the free market. However, China largely remains a socialist state with maximum of its enterprises being controlled or owned by its government.?
The recession of 2008-2010 was catapulted by the collapse of the US housing market which eventually spread across various industries, affecting not only the United States of America but the entire world at large.?
In the United States, the federal government responded by implementing a range of policy measures which included the American Recovery and Reinvestment Act of 2009. The federal government also gave funds to promote economic growth and produce more jobs. The state bank of the US took a number of other actions as well, which included lowering the interest rates and implementing quantitative easing. These actions were executed to support the country’s financial sector and promote economic growth.
On the other hand, China responded to the economic crisis by giving the government full control over how to manage the events that were unfolding before their eyes. The central government implemented stimulus spending, tax breaks, and interest rate cuts. It also took several measures that would help support and prevent the banking sector from collapsing. These measures included injecting capital into the banks and guaranteeing assets.?Similarly, in China much of the money that was given for the reconstruction and improvement of the infrastructure did not come from the Federal Reserve, but came from the state bank, and other state owned enterprises (Barboza, 2008). ?China is not a capitalist economy like the US. This is where it is seen the responses differed regarding the economic crisis of 2008-2010.?
Role of the State
One of the major differences between the two nations was the role the government or the state played in the economic sector. China’s response was molded by the stringent role of the central government. It enforced stimulus measures and regulated the financial sector. On the other hand, the United States of America focused primarily on market-based solutions which limited the role of the federal government. In other words, China focused on programs that would include spending on large-scale infrastructure. The US, on the contrary, focused on monetary policies and cutting taxes.?
Financial Systems in the US and China
China followed an isolationist policy, or a closed economy policy before the financial crisis occurred. It entailed that the global financial markets did not impact China’s financial system. The high degree of control enforced by the government allowed it to easily carry out policies that would mitigate the outcomes of the financial crisis. The US financial system is an open market, entailing it to be more integrated with international markets, giving the private sector greater control and making it quite difficult for the government to make independent decisions or intervene efficiently.?
Priority of Policies
There was a significant difference between what each state prioritized. China’s economy in the early 2000s was working its way up and wanted to become a leader in global politics. Therefore, the primary objective was to retain stability and avoid the consequences of global recession. At the same time, China wanted to promote its interests and boost its economic output. The United States focused on the stabilization of the country’s financial sector and took measures to prevent banks from collapsing.
Overall, while both the US and China implemented policies to mitigate the effects of the Global Financial Crisis, there were significant differences in their approaches. China relied more heavily on state intervention and focused on maintaining stability and promoting its interests, while the US placed a greater emphasis on market-based solutions and stabilizing the financial sector. These differences reflect broader differences in the economic systems and policy priorities of the two countries.
One key difference between the US and Chinese responses was the role of the private sector. In the United States, the private sector played a relatively limited role in the response to the economic crisis, as the federal government and the Federal Reserve took the lead in supporting the economy. In China, the private sector played a more significant role in the response, as the government relied on private investment and consumption to drive economic growth.
Focus of Response by the United States and China
Another key difference was the focus of the response. In the United States, the focus of the response was on stimulating economic growth and creating jobs, through measures such as the ARRA and the Fed's monetary policy actions. In China, the focus of the response was on maintaining economic stability and preventing a sharp decline in economic growth.
Overall, the Global Financial Crisis of 2008-2010 left a significant impact on the US and China. Poverty, unemployment, GDP growth, and inflation all were affected in one way or the other. The recession has a more devastating impact on the US since it had more exposure to the financial industry, with a highly market-oriented economy. China’s state-led economy with a shield from the global financial markets let it implement effective and efficient stimulus measures with helped it avoid a significant increase in unemployment.
Similarly, both the US and China saw a downfall in inflation and GDP. However, unlike the US, China recovered quickly as it focused on domestic supply and demand, and massive spending on infrastructure programs. The US revered slowly as it focused primarily on tax cuts and monetary policies.
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Chapter 7
Conclusion
The Global Financial Crisis of 2008 began in the United States but quickly rippled on to other countries around the world. The crisis was catapulted by the collapse of the housing market in the US (Berlatsky, 2010). It was fueled by a number of factors including lax lending standards, previous crises speculation, and low-interest rates. The housing bubble eventually burst and several homeowners found themselves stuck in a conundrum regarding their mortgage payments. The inability to pay mortgage payments led to a huge wave of defaults resulting in foreclosures. As a result, there was a downfall in mortgage-backed securities which were being held by major banks and other financial organizations (Berlatsky, 2010).
The government and private sector responded with several measures to stabilize the financial markets and support economic growth. These measures included bailout packages for financial institutions, fiscal stimulus measures, and monetary policies. The crisis also had a lasting effect on the world economy and led to a period of slow growth with increased regulation in the financial sector. The weaknesses of the world financial system were also exposed, sparking a debate about how the government can help prevent a future crisis by regulating the markets.
The financial crisis affected the US and China by and large. It affected unemployment, inflation, poverty, and GDP. Nevertheless, the consequences of the crisis were more harshly felt in the United States due to its market-oriented economy. China’s state let economic system with a closed economy allowed it to shield itself from the ripple effect caused by the economic crunch. Data suggests that the poverty rate in China remained low during the crisis as the country focused on large-scale stimulus measures (Berlatsky, 2010). On the other hand, America’s focus on the monetary policies left thousands of people homeless, and unemployed, making it hard to make ends meet. The approaches of both countries were visibly different. Although both states were able to avoid a full-fledged recession, their responses suggest wider differences in the priority of policies and the economic system between them.
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References
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Tables and Figures
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