Off the recession

Lucky that I am,

I entered the United Sates with a work visa, 2+ years of Mortgage sub-prime loans experience at that point of time my career was looking all bright and shiny. So once the eligibility card ie EAD (Employment Authorisation Card)was sent in I got the feeling of a winner already but "IT HAPPENED". Big companies who played in the sub prime market like UBS, Lehman Brothers, New Century, Citi Groups all started either laying off people or declaring millions of losses (again reminding me of my luck ). But not disheartened I went on applying for multiple jobs but unfortunately no reply. As my friend puts it in a funny way "apply apply no reply".

So this made me an avid follower of the News (never that I was). I started wondering as to what and who will do something about the recession which looked like to set in. Then just recently they said that the FED is changing the interest rates. This kind off sent me into a flashback into my college days where i had studied ways to come out of a recession. So I started my research on it so here are some of the ways by which recession can be taken care by the govt.

There are mainly 3 ways which I Found

-> Reserve Requirement
-> Discount Rate
-> Open market Operations.

But before going into the main ways of coming out, let me tell you about recession. Recession is a phase of Economic cycle where Unemployment is soaring(eg:me here, laid off people and new entrants into the market) , purchasing power of an individual is going down (eg:laid off people), prices of goods and services goes up (eg: Oil).
So the bottom underlying problem is the money supply by the FED is not matching with the demand for it. So here comes the way to tackle it.

Reserve Requirement:
All commercial banks, savings, checkings etc all of them have this rule that a certain percentage of money should be held back as reserves with the FED. That which cannot be either used for lending or any other operations. This basically is an amount sacrificed by the banks into the FED.

Coming to this as a measure, under recession the FED relaxes the percentage money on reserves to be kept aside by banks and hands over the addional money over the percentage received back to the Banks for lending purpose which has a multiplier effect. By doing so Banks have more money to lend so there motive is not to make more money here so they charge a very little interest rate on the borrower of money resulting in more consumption power by individuals, Businessmen Invest more (because of the less interest rate charged) creating more employment and slowly the purchasing power of the currency picks up.

Discount Rate:

This is where the Fed or Central Bank lend out money to other Banks at a discounted rate. This helps all the other Banks to lend more money but at a less interest rate, by doing so consumers have more money to buy more goods and services..increasing demand, Businessmen supply by investing more and employing more people to equal the supply so likewise it has the same affect as which happened in "Reserve Requirement" controlling the economy before it goes into recession.

Open Market Operations:

This is most widely used measure where the FED goes on buying securities inducing money into the market and money travels from one hand to another resulting a lift from recession.. The opposite will be done in case of Inflation.

Here i end this fascinating bit.. and yes dont call me a geek :-)