President Clinton took office in 1993, and set out to bring free trade to the US with the passage of NAFTA in 1994, an agreement that continues to be debated (Reuters. com, 2008). The Clinton way, however, was a break from the supply side Reaganomics of the 1980’s, as democrats set out to balance the budget and create a federal surplus. In 1994 the Federal Open Market Committee (FOMC) announced changes in its policy stance, and In 1995 began to explicitly announce the target level for the Fed Funds Rate, which was on its way to 6%. Inflation was low, and unemployment dropped below 5% for the first time in years.
The late 1990s were booming, the internet was taking off, and high tech IPO’s continued to hit the market at a healthy pace. (reuters. com, 2008) The 1997 Asian Financial crisis would also prove a boon to financial markets, and the overall US economy. Investors around the world would shun faltering Asian currencies, flocking to the stable booming US markets. In addition, high interest rates on US securities would further attract the growing influx of foreign investment (fas. org, 2008). The US Bond rate in 1997 would reach 6. 7% (federalreserve. gov, 2008).
In 1998, in a move coined the Greenspan Put, the Federal Reserve chair orchestrated a financial bailout of the hedge fund: Long Term Capital Management (LTCM), to preserve liquidity in the Capital Markets. Critics of the move, at that time, claimed it created a moral hazard, encouraging banks to assume more risk if they knew the Fed was willing to bail them out. Interestingly, some of those critics’ predictions may ring true today as we see the financial sector struggle. (goldmoney. com, 1998) By late in the nineties however, markets were soaring with the dot com boom, and the S;P 500 Index had grown to triple in size.
But this economy was overheated, and by 2000 markets would begin to give back a hefty 50%-75% of their gains. President George W. Bush took office, and by 2000 the Fed Funds Rate was at 6. 5%, still lower than where it had begun the decade, but times were about to change. 2000 GDP output was a mere . 3%, unemployment was on the rise again, and businesses were failing. Then came the terrorist attacks of September 11th 2001, stock markets went into a free fall, and the economy was pushed into recession. By 2003 the Fed Funds Rate was brought to historic lows of only 0. 75%.
All told however, the nineties were a historic period of peacetime expansion in the US economy. (UStreas. gov, 2008) Current Challenges with Fiscal and Monetary Policy The current economy has been experiencing a very different kind of growth as compared to the booming nineties. Inflation has been a constant risk, the housing market is in a great depression style downturn, and the cost of commodities is soaring. As some critics predicted in the previous decade, banks have taken on more risk of late. And, we have seen a modern day run on the bank situation with the collapse of investment bank Bear Stearns.