Paul Woods
PSC 485
Dr. Edward Kwon
4-14-11
How the U.S Economy affects International Countries

The United States of America has the most expansive economic system that out rivals any other country when compared to the U.S. The thought that if the United State’s financial system were to crumble would have a devastating effect for not only the United States but that of every other country in the northern as well as the southern hemisphere. It’s no surprise that the United States is one of the biggest exporter/importers in the world, but when the biggest country suffers economic turmoil, how does it affect the entire international community? The first question that I want to bring to the surface is what kind of impact does the Federal Reserve Bank have upon the United States economy and what exactly do their powers entail? In order to find out why our economy is in the shape it’s in, we must go straight to the source and find out what they are able to do as well as what must be done to keep our economy afloat. The second research question that I want to address covers the economic crisis that occurred in 2008-09, when Wall Street crashed, making it the second worst financial crisis since the Great Depression in 1929. We will deeper and examine the government bailouts and how it affected the GDP of domestic industry and on the international scale. Finally, our third question will be how we can focus our attempts to avoid instances like this in the future. We will look more closely at where oversight committee’s failed and what implications were to be put into place to monitor the large and powerful money makers that determine our future. This paper will take a look at what the Federal Reserve does, what’s it’s capable of, and the limits to their power. The devastating effects that took place in 2008-09 were the combination of poor oversight and the crumbling housing market, which not only affected our economy but that of the entire world. While huge businesses and corporations were bailed out at the government’s expense, shock waves were felt globally as money began to freeze immediately. In addition to lessons learned, it must be reminded that eventually when economies slowly begin to lend out money again and things seem to be more comfortable, we must remind ourselves how we economical weakened the global structure and what needs to be closely watched so that the same actions do not occur again. Along with Daniel Griffin’s paper that incorporates Financial Regulations, we not only look at the domestic aspect, but international complications as well. The Federal Reserve System (also known as the Federal Reserve, and informally as the Fed) is the central banking system of the United States. It was created in 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907. Over time, the roles and responsibilities of the Federal Reserve System have expanded and its structure has evolved. Events such as the Great Depression were major factors leading to changes in the system. Its duties today, according to official Federal Reserve documentation, are to conduct the nation's monetary policy, supervise and regulate banking institutions, maintain the stability of the financial system and provide financial services to depository institutions, the U.S. government, and foreign official institutions. Today, the Federal Reserve's responsibilities fall into four general areas: conducting the nation's monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices, supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers, maintaining the stability of the financial system and containing systemic risk that may arise in financial markets and providing certain financial services to the U.S. government, to the public, to financial institutions, and to foreign official institutions, including playing a major role in operating the nation's payments systems. The Fed holds an incredible amount of power and discretion, which is only answerable to the President of the United States of America. The Federal Reserve Bank knows full well that the United States is capable of financially ruining the entire globally economy. This couldn’t be more apparent than in 2008-09 when Bear Stearns failed and the Federal Reserve stepped in to arrange the sale to JP Morgan Chase. Bear Stearns was tied to as many banks as one could imagine, therefore if Bear Stearns went down, every bank attached to them would fail as well. The Fed understood that this bank was too big to fail and if they did serious implications would occur. One example of how interconnected the financial global community is occurred when Iceland’s government decided to privatize their three largest banks, which eventually wrecked their economy and started a global panic. Before this, the country had a terrific economy and a GDP of thirteen billion a year. In this instance, the government regulators did nothing to protect the citizens of Iceland and then at least a third of them went to work for the banks of Iceland. An example of this very same thing can be observed within the United States when the financial crisis happened here; the Federal Chairman at the time was Ben Bernanke. I believe that it is fair to put a large amount of the blame on his shoulders for the disaster that occurred, but he was reappointed to the Federal Chair by President Obama in 2009. It is vitally important that the Federal Reserve Bank do it’s best to protect not only the citizens of the United States of America, but also with the lives and well being of all of man-kind. When discussing the Housing bubble that popped in 2007, many things come to light that were overlooked at the current time. The Great Recession was something terrible and ugly in the making. This creature had been brewing since the late 70’s and was as fierce as ever by 2007. The Great Recession of 2008-09 has not one cause but several that were clearly underestimated by those in charge as well as average citizens of this country. The left will argue that there was a complete lack of regulation put in place to observe what was happening with mortgage lending. Robert J. Samuelson believes that “there was enough oversight that alert regulators should have spotted problems and intervened to stop dubious lending” (Samuelson, 19). They also say that there were numerous incentives for regulators and investors to ignore the risks that were being taking, which entails a tremendous amount of greed on their part of the matter. The left also states that there was a ‘mindless devotion to free markets’. Now their opponents on the right side of the fence will argue that interest rates had been too low for too long, and that the housing bubble had to pop eventually. They also insisted that the government’s housing policy was to get as many citizens to purchase a house as possible. They used tax incentives, rebates, and low interest rates to get homebuyers to act. I felt it was important to mention what the left and the right believed caused the Great Recession of 2008-09. Once we look at this disaster from afar and under a microscope, we tend to notice the real causes of the Great Recession. First off, things had been way too good for way too long, and the old saying goes “A good thing never lasts”. It was bound to happen at any given time, whether we were ready for it or not. We, the consumers, were over borrowing more and more. With the low interest rates, buyers were able to purchase more home than they originally anticipated on. We had thought that we had figured out how to solve the reasons for the downturn in our economic system, we thought that we’d figured out how to beat this beast of a monster, but we didn’t. We were in no better position than we were during the Great Depression of 1929. We had a 30 year period of financial deregulation, a system where failure could threaten the entire financial operation, or “too big to fail” motto where the government sees fit to save a financial institution from drowning along with all of the other institutions that it has connected with it. In March of 2008, Bear Sterns fails and the sale of that company was arranged for the sale to JP Chase Morgan. It was a spiral down from there on. It’s safe to assume that the deregulation of the financial institution as well as the advance in technology made the economy unsafe. Another aspect of excessive risk was involved with derivates. These were called credit default swaps or betting against CDO’s, a process where mortgage securities were sold and then bet against them. These mortgage securities were sold as a ‘safe’ investment. Subprime loans also contributed to much of the damage within the housing bubble that collapsed. It’s still too soon to get a better picture of how and why the market crashed, and more light will be shed on this in upcoming decades.
According to Richard Green and Susan Wachter, “The United States seems to have found a formula for offering favorable conditions and choices to mortgage borrowers, maintaining liquidity in mortgage markets and managing the risks of lending at fixed interest rates. The Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation—that is, Fannie Mae and Freddie Mac—play a central role in the United States mortgage market by raising funds to issue securitized mortgages and by playing an active role in the secondary market for mortgage-backed securities. This institutional framework for the United States mortgage market raises several questions. First, just how do Fannie and Freddie distribute the risk of mortgages with fixed interest rates and easy prepayment options across the economy? Second, even if Fannie and Freddie were useful in developing the United States market for securitized mortgages, could their functions now be replaced by fully private agents? Third, a number of analysts have pointed out that Fannie and Freddie have an anomalous status of being nominally private firms that nonetheless are perceived by capital market to have ties with federal government that allow them access to funds more cheaply than any potential competitor” (Green and Wachter, 106).
An article that I read by renown scholar C. Fred Bergsten has really brought the ideas of economics and foreign policy together in a brighter light. He states that “the United States has become heavily dependent on the world economy. At the same time, the ability of the United States to dictate the course of international economic activities has declined sharply. Hence the United States is caught in a scissors movement of growing importance, with major implications for the management of both its economy and its foreign policy. As a result, a paradox emerges concerning the conduct of U.S. international economic policy. On one hand, the growing importance of both exports and imports increases pressures on the United States to pursue a liberal trade and international investment policy. On the other hand, the growing penetration of its economy by foreign goods often increases the pressure to retreat from such open approaches to international exchange. The advent of new domestic pressures in the 1980’s, deriving in large part from slower economic growth and higher rates of unemployment, sharpens this tension. And the budgetary constraints that must accompany any effort to reduce inflation limit further the ability of the United States to pursue its international economic goals. In sum, there are important new international constraints on U.S. domestic policy and equally important new domestic constraints on U.S. international economic policy” (Bergsten, 11).
In order to look forward, we must look at our past and view the mistakes that were made so that we don’t make those same mistakes in the future. However, with politics especially, anything is possible and nothing should be overlooked. I agree with Robert Strausz-Hupe when he states “International politics, like nature, is a system of processes. There is no simple causes and effects of historical developments. The record of the past tends to determine the present—until circumstance intervenes. Peoples, like individuals, are at the mercy of what is called chance, and an apparently meaningless combination of circumstances may frustrate the culmination of long-developed tendencies” (Hupe, 76). Our financial situation has turned around and we are starting to recover, but the effects have ruined many lives and impacted the country harder than most people can possibly fathom. I honestly believe that we need new and fresh think thanks to run the economic policies that our government depends on so much. Academic individuals should be in charge of these issues, not bureaucracy politicians. When discussing the overall quality of oversight committee’s of foreign policy, one must really know where to look to see if their job is really being conducted in the best interest. According to Fred Kaiser, “the finding that international relations is one of the most active overseers in the House should not be surprising when considering the committee characteristics that facilitate oversight multiple and autonomous subcommittees, adequate financial and staff resources, a supportive chairperson, substantial member interest, and limited legislative jurisdiction” (Kaiser, 259). I completely agree with Kaiser and his thinking, seeing a new side of the equation.
In closing, I wanted to use a quote from Barrington Moore that makes you ask more questions and dig deeper and deeper. Mr. Moore says “In any society the dominant groups are the ones with the most to hide about the way society works. Very often therefore truthful analyses are bound to have a critical ring, to seem like exposures rather that objective statements. For all students of human society sympathy with the victims of historical processes and skepticism about the victors’ claims provide essential safeguards against being taken in by the dominant mythology. A scholar who tries to be objective needs these feelings as part of his working equipment” (Robinson, 615).

Bibliography

Bergsten, C. Fred. 1982. “The United States and the World Economy”, Annals of the American Academy of Political and Social Science 460: 11-20

Green, Richard and Susan Wachter. 2005. “The American Mortgage in Historical and International Context”, The Journal of Economic Perspectives 19(4): 93-114

Strausz-Hupe, Robert. 1948. “U.S. Foreign Policy and the Balance of Power”, The Review of Politics 10(1): 76-83

Kaiser, Fred. 1977. “Oversight of Foreign Policy: The U.S. House Committee on International Relations”, Legislative Studies Quarterly 2(3): 255-279

Robinson, William. 1996. “Globalization, the World System, and ‘Democracy Promotion’ in U.S. Foreign Policy”, Theory and Society 25(5): 615-665