American Recovery Act

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pulled out from uncertain assets and less and less people were buying houses. Many consumers believed that the economy was bad and cut back on spending not having job security therefore they contributed even further into bringing the country in profounder recession. Personal consumption fail nearly 5% and private investment shrunk 31% at annual rate causing small business to suffer losses.

Citi Group was of the many other financial institutions that suffered the consequences of the 2007 meltdown. In October 2008 CEO of Citi Vikram Pandit announced that 50,000 jobs would be cut as part of cutting expenses by 20%. The stock fallen from $ 35 to under $ $4 in less than a year. On the other hand Bank of America stock has fallen 64% and loss on credit card debt were on rise, auto loans and real estate mortgages were defaulting to make payments. The meltdown of Citi Group ended in November 17, 2008 when federal officials decided to rescue the largest financial institution in the world, by doing so they prevented catastrophic damage to the economy. Citigroup agreed to a Government proposal that would provide Citigroup asset guarantees and a $20 billion capital infusion in exchange for preferred shares of Citi group stock. The government was going to guarantee a toxic asset pool at Citigroup up to $ 306 billion and reduced it later to $ 301 Billion and the fee for this arrangement, Citigroup would give the government $7.059 billion in perpetual shares, paying 8% annual dividend. The 8% dividend would come from the injection of $ 20 billion in cash from the government. In 2009 Citigroup was more profitable than the previous year. Citigroup reported 14.8 billion in Net income versus 6.2 billion reported in 2008.

When the Government assured the world in that it would not let Citigroup fail, it did more than reassure troubled markets – it encouraged high-risk behavior by insulating risk takers from the consequences of failure.

There are many reasons why government intervention is good for business and regulation. As far as my generation we witness the outcome of The American Recovery and Reinvestment Act and The trouble Asset Recovery Program. Without help of federal government our economy would have suffered a great economic loss. Government spending, tax cuts, extended unemployment insurance, infrastructure spending fueled the US economy creating more jobs and increasing GDP.