Economics for business Essay Example | Topics and Well Written Essays - 1500 words - 2

Economics for business - Essay Example The US economy’s success in the past with their macroeconomic policies is reflected in the Federal Reserve’s successful management of the economy during the economic meltdown in 2000 and 2001. The dot.com meltdown along with the subsequent recession brought down the US economy in early 2001 with high levels of unemployment and plunging equity markets. But with the government’s repeated tax cuts and Federal Reserve’s interest rate reductions, the economy was back on its feet in a short span of time. The economy grew steadily post that through the end of 2007, with real GDP expanding at an annual rate of 2.6% during this period. Productivity rose at a 3% rate, equity markets soared, unemployment rate fell to 4.4%, inflation remained low and consumer spending grew by 5.5% year-on-year (Rattner, Steven). With capital readily available, the cost of borrowing fell to record lows and lending grew at a rapid pace. With the soaring economy, the level of corporate bond defaults reached its all time lows. With record liquidity in the credit market, the economy went all out and volumes of leveraged buyouts soared. Leveraged buyouts are a sign of an ambitious take-over as the financing in such a case is mobilized principally through risky bonds that carry high interest rates. Such low rated debts swelled to 35% of the total high yield issuances in the US (Rattner, Steven). In 1994, less than 5% of the total mortgages were subprime in the US; in 2005, the figure was up to 20%. The rates of interest began to increase in 2005 after years of stable and decreasing trend (EconomyWatch.com). This led to fall in demand for houses, which brought down the house prices as well. A number of house owners who were highly leveraged on subprime mortgages found themselves neither being able to combat the increase in payment nor sell of their houses. â€Å"According to a National Bureau of Economic Research study published in 2003, the