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United States of Americas Fiscal Crisis

Fiscal crisis is a term used to denote ‘structural gap’ between states expenses and revenues that lead to political, social and economic crisis. The USA financial crisis began way back in 2007 to 2008. This was also the year that saw the Global Financial crisis affect the entire world. It almost resulted in total downfall of the larger financial institutions. Its aftermath included the bail out of most banks by the national governments and the down turn in the stock markets in the entire world. This paper will try to show my own opinion of the positions took by the president and congress in trying to avert the crisis.

The fiscal crisis originated from the investments banks and the commercial banks’ lending vast amounts of money; in trillions of dollars, to the consumer loan borrowers and house purchasers ill equipped to pay back. The borrowed money pushed up the housing prices in America, which then increased higher when speculators bought the houses in expectation that the prices will increase even higher. When the lending slowed down and then came to a stop during 2006 to 2007, the housing prices began to fall. The so called housing boom begun to unravel and then threatened the economy with the crisis we see today.

The president’s position about how to avoid the fiscal crisis is to help the middle class citizens to pull through these hard times. His position seems to be correct as the people in the middle class are the drivers of the economy. Once they fail the economy collapses. In early January president Obama raised the income taxes rates on families earning over $450,000 per Annam. This is about 1% of the households in America. The alternative was for everyone in the country to pay more in taxes. With the unemployment rate still high, most families will find the president’s decision better than what the republican lead congress were proposing. This will bring more revenue to treasury, but the country still has a long way to go. With a short term crisis averted, he still faces another task of whether to raise the country’s debt ceiling of $16.4 trillion, as well as increasing the automatic spending cuts for the military of $100 billion.

The republicans, on the other hand, will not let the president increase the debt ceiling. They want the president to propose deep cuts in spending, an offer the president has rejected. The proposals will affect the education sector and the health sector negatively. The divided congress and the president have two different proposals on how to tackle the debt ceiling in America

Congress, which is largely controlled by the Republican Party have a different view on what way they would like the crisis averted. The balanced framework for averting the fiscal cliff’ is by coupling spending cuts and reforming the new tax revenue. The republicans plan includes a $2.2 trillion deficit savings through the coming decade, as well as $600 billion in health savings and Medicare reforms, $800 billion in tax reforms. Also, included is a $200 billion savings from revising the measure of inflation; consumer price index. The president rejected this proposal because the republicans did not demand more from the country wealthiest people. The spending cuts they propose will do more harm than good. Many people will become redundant in the work forces since restructuring is done in order to cater for spending cuts the house is proposing.

The spending cuts, which are being enforced today, are as a result of a non bi-partisanship in congress. It is as a consequence of the automatic spending cuts written into law during the previous budget meeting crisis in 2011. It has already started having an effect in the economy. They USA military leaders have directed their staff to begin cutbacks and froze the hiring of more people to the military. This will compromise the troops in harm’s way as these cuts will lead to grounding of the aircrafts, reduction of combat vehicles as the money for maintenance and operations will be severely reduced. Airport staff officials will have to restructure themselves as they too will be affected. Teachers will no longer be hired in the coming months as the money to do so is no longer available. This spending cuts will extend to the middle class who are the ones affected by this move.

In order to resolve the crisis, the USA must solve the four cascading threats: First, is the sharp decline in consumer spending on autos, other durables, and houses. The sharp decline in lending to households will lead to a recession as the construction of houses and production of consumer durable goods drops. Second, due to the banks not lending to the households, many homeowners have and will default on their consumer goods and mortgage payments, especially when the house value falls below the mortgage value. Third, due to fall in capital, the banking sector will have to cut back on its lending after write-offs of defective consumer loans and mortgage. Capital loss pushes financial institutions into forced mergers with stronger banks or into bankruptcy. Fourth, the cut back in lending threatens the short term loans which banks and other financial institution lend to each other as working capital. With all this in mind, the USA should extend tax cuts to families earning less than $250,000 per Annum. This should ensure that they have a favorable disposable income and that the sharp decline of consumer spending is averted. Congress should also allow the tax rate to return to the Clinton-era levels for the wealthy.